UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________

 

FORM 10-Q

_______________

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 For the transition period from ______to______. 

 

Commission file number   000-51886

 

MAX SOUND CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware   26-3534190
State or other jurisdiction of incorporation or organization   (I.R.S.  Employer Identification No.)
     

8837 Villa La Jolla Drive, Unit 12109

La Jolla, California

 

 

92039

(Address of principal executive offices)   (Zip Code)
     

_______________

 

(800) 327-6293

(Registrant’s telephone number, including area code)

_______________

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
(Do not check if a smaller reporting company)      

 

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock.

 

As of May 2 , 2016, the registrant had 805,650,972 shares, par value $0.00001 per share, of common stock issued and outstanding.

 

 
 

 

MAX SOUND CORPORATION

 

FORM 10-Q

for the period ended March 31, 2016

 

INDEX   

 

PART I-- FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
     
PART II-- OTHER INFORMATION  
     
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Mine Safety Disclosures 25
Item 5. Other Information 25
Item 6. Exhibits 25
   

SIGNATURES

 

  26

 

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

 

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.

 

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 

CERTAIN TERMS USED IN THIS REPORT

 

When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to Max Sound Corporation, and “SEC” refers to the Securities and Exchange Commission.

   

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MAX SOUND CORPORATION

 

CONTENTS

 

PAGE 4 CONDENSED BALANCE SHEETS AS OF MARCH 31, 2016 (UNAUDITED) AND AS OF DECEMBER 31, 2015 (AUDITED).
     
PAGE 5 CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTH ENDED MARCH 31, 2016 AND 2015 (UNAUDITED).
     
PAGE 6 CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2016 (UNAUDITED).
     
PAGES 7 - 19 NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED).

  

 

 
 

 

Max Sound Corporation

Condensed Balance Sheets

ASSETS

    March 31, 2016   December 31, 2015
    (UNAUDITED)    
         
Current Assets                
Cash   $ 650,802     $ 211,064  
Prepaid expenses     74,295       82,681  
Debt offering costs - net     23,969       36,699  
Total Current Assets     749,066       330,444  
                 
Property and equipment, net     113,699       130,961  
                 
Other Assets                
Security deposit     413       413  
Intangible assets     1,064,426       1,092,621  
Total Other Assets     1,064,839       1,093,034  
                 
                 
Total Assets   $ 1,927,604     $ 1,554,439  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)                
                 
Current Liabilities                
Accounts payable   $ 1,693,563     $ 1,393,074  
Accrued expenses     292,647       257,457  
Accrued expenses - related party     473       473  
Note payable     80,000       —    
Derivative liability     8,331,961       3,684,184  
Convertible note payable, net of debt discount of $2,634,001 and $2,658,213 respectively     2,169,082       1,976,639  
Total Current Liabilities     12,567,726       7,311,827  
                 
Commitments and Contingencies                
                 
Stockholders' Equity/(Deficit)                
Preferred stock,  $0.0001 par value; 10,000,000 shares authorized,                
No shares issued and outstanding     —         —    
Series, A Convertible Preferred stock,  $0.00001 par value; 10,000,000 shares authorized,                
5,000,000 and 0 shares issued and outstanding, respectively     50       50  
Common stock,  $0.00001 par value; 1,650,000,000 shares authorized,                
726,712,048 and 422,310,693 shares issued and outstanding, respectively     7,266       4,222  
Additional paid-in capital     60,208,531       58,052,946  
Treasury stock     (519,575 )     (519,575 )
Accumulated deficit     (70,336,394 )     (63,295,031 )
Total Stockholders' Equity /(Deficit)     (10,640,122 )     (5,757,388 )
                 
Total Liabilities and Stockholders' Equity/(Deficit)   $ 1,927,604     $ 1,554,439  

 

 

See accompanying notes to condensed unaudited financial statements.

 
 

 

Max Sound Corporation

Condensed Statements of Operations

(UNAUDITED)

 

    For the Three Months Ended,
    March 31, 2016   March 31, 2015
         
         
Revenue   $ —       $ —    
                 
                 
Operating Expenses                
General and administrative     544,524       787,303  
Consulting     69,690       69,837  
Professional fees     109,920       117,624  
Website development     21,000       5,000  
Compensation     212,000       241,300  
Total Operating Expenses     957,134       1,221,064  
                 
Loss from Operations     (957,134 )     (1,221,064 )
                 
Other Income / (Expense)                
Other income     35,207       —    
Loss on inventory write off     —         (29,275 )
Interest expense     (89,460 )     (56,443 )
Derivative Expense     (2,081,092 )     (167,523 )
Amortization of debt offering costs     (34,468 )     (53,093 )
Loss on debt settlement     (99,394 )     —    
Amortization of debt discount     (1,338,958 )     (919,760 )
Change in fair value of embedded derivative liability     (2,476,063 )     473,735  
Total Other Income / (Expense)     (6,084,228 )     (752,359 )
                 
Provision for Income  Taxes     —         —    
                 
Net Loss   $ (7,041,362 )   $ (1,973,423 )
                 
Net Loss Per Share  - Basic and Diluted   $ (0.01 )   $ (0.01 )
                 
Weighted average number of shares outstanding                
during the year Basic and Diluted     583,890,510       341,970,037  

    

See accompanying notes to condensed unaudited financial statements.

 

 
 

 

Max Sound Corporation

Condensed Statements of Cash Flows

(UNAUDITED)

 

    For the Three Months Ended,
    March 31, 2016   March 31, 2015
Cash Flows From Operating Activities:                
Net Loss   $ (7,041,362 )   $ (1,973,423 )
  Adjustments to reconcile net loss to net cash used in operations                
   Depreciation/Amortization     20,164       19,208  
   Stock and stock options issued for services     105,600       32,731  
   Warrants issued for services     60,078          
   Amortization of intangible assets     28,195       263,590  
   Amortization of debt offering costs     34,468       17,361  
   Amortization of debt discount     1,338,958       953,494  
   Change in fair value of derivative liability     2,474,348       (460,555 )
   Gain/(Loss) on debt extinguishment     (35,200 )     —    
   Derivative Expense     2,081,092       167,523  
  Changes in operating assets and liabilities:                
      (Increase)/Decrease in inventory     —         29,275  
      (Increase)/Decrease in prepaid expenses     8,386       1,245  
      Increase/(Decrease) accounts payable     304,933       240,528  
      Increase/(Decrease) in accrued expenses     88,833       69,453  
Net Cash Used In Operating Activities     (531,507 )     (639,570 )
                 
Cash Flows From Investing Activities:                
  Purchase of property equipment     (2,901 )     (2,757 )
Net Cash Used In Investing Activities     (2,901 )     (2,757 )
                 
Cash Flows From Financing Activities:                
  Proceeds from stockholder loans / lines of credit     —         25,000  
  Repayment from stockholder loans / lines of credit     —         (75,000 )
  Repayment of convertible note     (301,402 )     (55,000 )
  Proceeds from issuance of convertible note, less offering costs and OID costs paid     1,295,548       733,477  
  Repayment of note payable     (20,000 )     —    
Net Cash Provided by Financing Activities     974,146       628,477  
                 
Net Increase (Decrease) in Cash     439,738       (13,850 )
                 
Cash at Beginning of Year     211,064       35,747  
                 
Cash at End of Year   $ 650,802     $ 21,897  
                 
Supplemental disclosure of cash flow information:                
                 
Cash paid for interest   $ —       $ —    
Cash paid for taxes   $ —       $ —    
                 
Supplemental disclosure of non-cash investing and financing activities:                
Shares issued in conversion of convertible debt and accrued interest   $ 1,258,451     $ 1,368,990  
Conversion of common to preferred stock   $ —       $ 1,200  
Reclass of convertible debt to demand note   $ 100,000     $ —    

 

See accompanying notes to condensed unaudited financial statements. 

 

 
 

 

MAX SOUND CORPORATION

NOTES TO FINANCIAL STATEMENTS

AS OF MARCH 31, 2016

(UNAUDITED)

 

 

NOTE 1           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION

 

(A) Organization and Basis of Presentation

 

Max Sound Corporation (the "Company") was incorporated in Delaware on December 9, 2005, under the name 43010, Inc. The Company business operations are focused primarily on developing and launching audio technology software.

 

Effective March 1, 2011, the Company filed with the State of Delaware a Certificate of Amendment of Certificate of Incorporation changing our name from So Act Network, Inc. to Max Sound Corporation.

 

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in The United States of America and the rules and regulations of the Securities and Exchange Commission applicable to interim financial information and with instructions to Form 10Q and Articles of Regulations S-X.. Accordingly, they do not include all the information necessary for a comprehensive presentation of financial position and results of operations.

 

It is management's opinion, however, that all material adjustments (consisting of normal and recurring adjustments) have been made which are necessary for a fair financial statements presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.

 

These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 30, 2015.

 

(B) Use of Estimates

 

In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.

 

(C) Cash and Cash Equivalents

 

For purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of March 31, 2016 and December 31, 2015, the Company had no cash equivalents.

 

(D) Property and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is provided using the straight-line method over the estimated useful life of three to five years.

 

(E) Research and Development

 

The Company has adopted the provisions of FASB Accounting Standards Codification No. 350, Intangibles - Goodwill & Other (“ASC Topic 350”) . Costs incurred in the planning stage of a website are expensed as research and development while costs incurred in the development stage are capitalized and amortized over the life of the asset, estimated to be three years. Expenses subsequent to the launch have been expensed as website development expenses.

 

(F) Concentration of Credit Risk

 

The Company at times has cash in banks in excess of FDIC insurance limits. At March 31, 2016 and December 31, 2015, the Company had approximately $400,802 and $0, respectively in excess of FDIC insurance limits.

 

(G) Revenue Recognition

 

The Company recognized revenue on arrangements in accordance with FASB Codification Topic 605, “Revenue Recognition” (“ASC Topic 605”). Under ASC Topic 605, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. We had revenues of $0 and $0 for the three months ended March 31, 2016 and 2015, respectively.

 

(H) Advertising Costs

 

Advertising costs are expensed as incurred and include the costs of public relations activities. These costs are included in consulting and general and administrative expenses and totaled $0 and $0 for the three months ended March 31, 2016 and 2015, respectively.

 

(I) Inventories

 

Inventory consists primarily of finished goods and is valued at the lower of cost or market. Cost is determined using the weighted average method and average cost is recomputed after each inventory purchase or sale. Inventory is periodically reviewed in order to identify obsolete or damaged inventory and impaired values. For the year ended December 31, 2015, the inventory was impaired and valued at $0. The Company had no inventory as of March 31, 2016.

 

  (J) Identifiable Intangible Assets

 

ASC 350 prescribes a two-step process for impairment testing of goodwill and intangibles with indefinite lives, which is performed annually, as well as when an event triggering impairment may have occurred. ASC 350 also allows preparers to qualitatively assess goodwill impairment through a screening process which would permit companies to forgo Step 1 of their annual goodwill impairment process. This qualitative screening process will hereinafter be referred to as "Step 0". Goodwill and intangible assets deemed to have an indefinite life are tested for impairment on an annual basis, or earlier when events or changes in circumstances suggest the carrying amount may not be fully recoverable. The Company has elected to perform its annual assessment on $16,796,237 of intangible assets. For the year ended December 31, 2015, $15,703,616 impairment loss has been recorded due to a change in business model, this being significantly impacted by the impairment of Liquid Spins assets, as digital music sales are no longer relevant in today’s market for the following assets:

 

      Initial Cost       Impairment Loss       Balance as of March 31, 2016  
Trademarks   $ 7,500,000     $ (6,630,419 )     869,581  
Distribution rights     7,372,561       (7,372,561 )     —    
Licensing Rights     1,923,401       (1,700,393 )     223,008  
Other     275       (243 )     32  
    $ 16,796,237       (15,703,616 )     1,064,426  

 

As of March 31, 2016 and December 31, 2015, $869,581 and $869,581, respectively, of costs related to registering a trademark and acquiring technology rights [audio technology known as Max Audio Technology (MAXD)] have been capitalized. It has been determined that the trademark and technology rights have an indefinite useful life and are not subject to amortization. However, the trademark and technology rights will be reviewed for impairment annually or more frequently if impairment indicators arise. As a result of this review, the Company recorded an impairment loss of $6,630,419 that is recorded as impairment loss on intangible asset for the year ended December 31, 2015.

 

On November 15, 2012, the Company acquired the rights to assets and audio technology known as Liquid Spins, Inc. through a share exchange, whereby the Company issued 24,752,475 shares of common stock for their rights in Liquid Spins technology. As of March 31, 2016 and December 31, 2015, $0 and $0, respectively, of costs related to this intangible remain capitalized. The technology was placed in service on August 23, 2013 with a useful life of 10 years. During 2015, the Company the reviewed the intangible asset for impairment and determined that certain items had been impaired due to obsolescence. As a result of this review, the Company recorded an impairment loss of $7,372,562 that is recorded as impairment loss on intangible asset.

 

On May 19, 2014, the Company entered into an agreement with VSL Communications to acquire the rights to intellectual property titled “Optimized Data Transmission System and Method” (“ODT”) through a cash payment of $500,000 in addition to a share issuance, whereby the Company issued 10,000,000 shares of common stock, valued at $1,000,000 ($0.10/share). In exchange, the Company received a perpetual, exclusive, worldwide license to the ODT technology for all fields of use. In addition, the Company issued 1,000,000 shares of common stock, valued at $120,000 ($0.12/share), as compensation for the introduction and identification of a seller based on the agreement dated April 10, 2014. As of March 31, 2016 and December 31, 2015, $187,830 and $187,830, respectively, of costs related to the “ODT” intangible asset remains capitalized. The technology will be reviewed for impairment annually or more frequently if impairment indicators arise. In connection with this agreement, the Company is obligated to make an additional five (5) payments totaling $1,000,000 to be made every 30 days, with the thirty (30) day periods to be waived if fund raising occurs on an anticipated faster time line. The payments of additional cash are contingent on the following funding criteria:

 

  The Company shall pay set increments of cash based on a percentage of gross funds received through funds raised.
  The Company shall pay 20% of such monies as soon as they are received.

 

In connection with funds raised through March 31, 2016, the Company recorded a liability and expensed $1,068,665 as royalty cost, related to the 20% fee, as of December 31, 2015, $30,000, has been paid. The remaining liability as of March 31, 2016, is $1,033,000 and is included in accounts payable.

 

The Company shall act as the exclusive agent to facilitate and negotiate any opportunities on behalf of ODT to Companies, Organizations and other qualified entities. Upon any closing, ODT shall receive 50% of gross dollars and the Company shall receive the other 50% at the time of a completion of any transaction opportunity, including legal settlements after subtracting applicable contingent legal fees. The term of the agreement is for the life of the acquired intellectual property. As a result of this review, the Company recorded an impairment loss of $6,630,419 on intangible asset $1,432,170.

 

 
 

 

On August 11, 2014, the Company and VSL simultaneously filed trade secret and patent infringement actions against Google, Inc. and its subsidiaries, YouTube, LLC and On2 Technologies, Inc., relating to proprietary and patented technology owned by Vedanti Systems Limited, a subsidiary of VSL.  The patent infringement complaint was brought in U.S. District Court for the District of Delaware and the trade secret suit was filed in Superior Court of California, County of Santa Clara.  The lawsuits contend that, in 2010, while Google was in discussions with Vedanti about the possibility of acquiring Vedanti's patented digital video streaming techniques and other proprietary methods, Google gained access to and received technical guidance regarding Vedanti’s proprietary codec, a computer program capable of encoding and decoding a digital data stream or signal.  The complaints allege that soon after the two companies initiated negotiations, Google began implementing Vedanti's technology into its own WebM/VP8 video codec without informing Vedanti, and without compensating Vedanti for its use.  Plaintiffs are seeking a permanent injunction against Google, compensatory damages, as well as treble damages. As exclusive agent to VSL to enforce all rights with respect to the subject technology, the Company has hired Grant & Eisenhofer, PA to represent the Company and VSL in the suits. On November 24, 2015 the District Court entered an order granting the Google defendants’ motion to dismiss. The Company timely filed it notice of appeal with the appeals court on February 22, 2016. The two issues on appeal are, (i) whether the district court erred by granting the Google defendants’ motion to dismiss the Company’s lawsuit on the ground that the Company lacked standing to sue the Google defendants for infringement of the 339 patent, and (ii) whether the district court erred by denying the Company’s motion for leave to amend the complaint and add as a party VSL, a former licensee of the 339 patent to cure any defect in prudential standing to the extent VSL is a necessary party. These cases will be vigorously prosecuted and the Company believes it has a good likelihood of success. 

 

On May 22, 2014, the Company entered into a five (5) year agreement to acquire the rights to intellectual property titled “Engineered Architecture” (“EA Technology”) through a cash payment of $50,000 in addition to a share issuance, whereby the Company issued 4,000,000 shares of common stock, valued at $394,000 ($0.0985/share). In exchange, the Company received for the term of the agreement, the exclusive worldwide right to use the EA Technology. As of December 31, 2015, $35,178 of costs related to this intangible remains capitalized. The technology will be reviewed for impairment annually or more frequently if impairment indicators arise. As a result of this review, the Company recorded an impairment loss of $268,223 on intangible asset.

 

In connection with this agreement, the Company is obligated to make an additional five (5) payments totaling $500,000 to be made every 30 days, with the thirty (30) day periods to be waived if fund raising occurs on an anticipated faster time line. The payments of additional cash are contingent on the following funding criteria:

 

  The Company shall pay set increments of cash based on a percentage of gross funds received through funds raised.
  The Company shall pay 10% of such monies as soon as they are received.

 

In connection with funds raised through March 31, 2016, the Company recorded a liability and expensed $534,332 as royalty cost, related to the 10% fee, as of March 31 , 2016, $40,000 has been paid. The remaining liability as of March 31, 2016, is $501,500 and is included in accounts payable.

  

The Company shall act as the exclusive agent to facilitate and negotiate any opportunities on behalf of EA Technology to Companies, Organizations and other qualified entities. Upon any closing, EA shall receive 50% of gross dollars and the Company shall receive the other 50% at the time of a completion of any transaction opportunity, including legal settlements after subtracting applicable contingent legal fees. In the event the Company sublicenses EA to other entities, profits shall be split evenly 50%/50%.

  

(K) Impairment of Long-Lived Assets and Intangible Assets with Definite Life

 

The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets, such as technology rights, be reviewed for impairment annually, or whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value. The Company recorded $0 and $15,703,617 in impairment of the intangible asset for the three months ended March 31, 2016 and the year ended December 31, 2015, respectively (See Note 1J).

 

(L) Loss Per Share

 

In accordance with accounting guidance now codified as FASB ASC Topic 260, “Earnings per Share,” Basic earnings (loss) per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive. Because of the Company’s net losses, the effects of stock warrants and stock options would be anti-dilutive and accordingly, is excluded from the computation of earnings per share.

 

The computation of basic and diluted loss per share for the years ended March 31, 2016 and 2015 excludes the common stock equivalents of the following potentially dilutive securities because their inclusion would be anti-dilutive:

 

 
 

 

    March 31, 2016   March 31, 2015
                 
Stock Warrants (Exercise price - $0.25 - $.52/share)     18,270,690       6,500,000  
Stock Options (Exercise price - $0.10 - $.50/share)     2,866,652       15,566,652  
Convertible Debt  (Exercise price - $0.07 - $.0817/share)     2,791,745,292       177,891,339  
Series A Convertible Preferred Shares ($0.0/share)     125,000,000       —   
                 
Total     2,937,882,634       5,000,000  

 

(M) Income Taxes

 

The Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”) Income Taxes. Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

The Company's federal income tax returns are no longer subject to examination by the IRS for the years prior to 2011, and the related state income tax returns are no longer subject to examination by state authorities for the years prior to 2010.

 

(N) Business Segments

 

The Company operates in one segment and therefore segment information is not presented.

 

(N) Recent Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest–Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company is currently in the process of evaluating the impact of adoption of ASU 2015-03 on its balance sheets.

 

All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.

 

(P) Fair Value of Financial Instruments

 

The carrying amounts on the Company’s financial instruments including prepaid expenses, accounts payable, accrued expenses, derivative liability, convertible note payable, and loan payable - related party, approximate fair value due to the relatively short period to maturity for these instruments.

 

We adopted accounting guidance for financial and non-financial assets and liabilities (ASC 820). The adoption did not have a material impact on our results of operations, financial position or liquidity. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

 

The following are the major categories of liabilities measured at fair value on a recurring basis: as of March 31, 2016 and December 31, 2015, using quoted prices in active markets for identical liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):

 

 
 

 

    March 31, 2016   December 31, 2015
                                 
    Fair Value Measurement Using   Fair Value Measurement Using
                                 
      Level 1       Level 2       Level 3       Total       Level 1       Level 2       Level 3       Total  
                                                                 
Derivative Liabilities     —         8,331,961       —         8,331,961       —         3,684,184       —         3,684,184  
Intangible Assets     —         1,064,425       —         1,064,426       —         1,092,621       —         1,092,621  

 

(Q) Stock-Based Compensation

 

In December 2004, the FASB issued FASB Accounting Standards Codification No. 718, Compensation - Stock Compensation. Under FASB Accounting Standards Codification No. 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As such, compensation cost is measured on the date of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant. The Company applies this statement prospectively.

 

Equity instruments (“instruments”) issued to other than employees are recorded on the basis of the fair value of the instruments, as required by FASB Accounting Standards Codification No. 718. FASB Accounting Standards Codification No. 505, Equity Based Payments to Non-Employees defines the measurement date and recognition period for such instruments. In general, the measurement date is when either a (a) performance commitment, as defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the FASB Accounting Standards Codification.

 

(R) Reclassification

 

Certain amounts from prior periods have been reclassified to conform to the current period presentation. These reclassifications had no impact on the Company's net loss or cash flows.

 

(S) Derivative Financial Instruments

 

Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.

 

Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model. 

 

(T) Original Issue Discount

 

For certain convertible debt issued, the Company provides the debt holder with an original issue discount. The original issue discount is recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.

 

(U) Debt Issue Costs and Debt Discount

 

The Company may pay debt issue costs, and record debt discounts in connection with raising funds through the issuance of convertible debt. These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.

   

(V) Licensing & Distribution

 

On June 20, 2015, the Company entered into a license agreement with Santok LTD of United Kingdom (“Santok). The term of the agreement is three years. Santok will pay the Company a royalty fee of $1.50 for each licensed product. Santok guarantees to the Company a minimum total of 150,000 cumulative licensed product installation with a minimum total guaranteed value of $225,000 over the three years of the agreement. If the total royalty paid is less than the guaranteed value, Santok will pay the difference.

 

On July 13, 2015, the Company entered into a license agreement with Luna Mobile, Inc. of United States (“Luna). The term of the agreement is three years. Luna will pay the Company a royalty fee of $1.50 for each licensed product manufactured and sold.

 

 
 

 

NOTE 2           GOING CONCERN 

 

As reflected in the accompanying condensed unaudited financial statements, the Company had a net loss of $7,041,362 for the three months ended March 31, 2016, has an accumulated deficit of 70,336,394 as of March 31, 2016, and has negative cash flow from operations of $531,507 for the three months ended March 31, 2016.

 

As the Company continues to incur losses, transition to profitability is dependent upon the successful commercialization of its products and achieving a level of revenues adequate to support the Company’s cost structure.

 

The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional cash. Management intends to fund future operations through additional private or public debt or equity offerings. Based on the Company’s operating plan, existing working capital at December 31, 2014 was not sufficient to meet the cash requirements to fund planned operations through March 31, 2016 without additional sources of cash. This raises substantial doubt about the Company’s ability to continue as a going concern.  The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include adjustments that might result from the outcome of this uncertainty.

 

NOTE 3           DEBT AND ACCOUNTS PAYABLE

 

Debt consists of the following:

    As of   As of
    March 31, 2016   December 31, 2015
                 
Line of credit - related party   $ 473     $ 473  
                 
Convertible debt     4,803,083       4,634,852  
Less: debt discount     (2,634,001 )     (2,658,213 )
Convertible debt - net     2,169,082       1,976,639  
 Demand note     80,000          
Total current debt     2,249,555     $ 1,977,112  

 

  (A) Line of credit – related party

 

Line of credit with the principal stockholder consisted of the following activity and terms:

 

    Principal   Interest Rate   Maturity
Balance - December 31, 2015   $ 473                  
                         
Borrowings during the three months ended March 31, 2016     —         4 %     September 26, 2016  
Interest accrual     —                    
Repayments     —                    
Balance - March 31, 2016   $ 473       4 %     September 26, 2016  

 

Accounts payable consists of the following :

 

    As of March 31, 2016   As of December 31, 2015
                 
Accounts Payable   $ 1,693,563     $ 1,393,074  
                 
Total accounts payable   $ 1,693,563     $ 1,393,074  

 

Accounts payable for the year ended included royalty payments due to VSL agreement entered into on August 11, 2014 in the amount of $1,033,000 and EA Technology agreement entered into on May 22, 2014 in the amount of $ 501,500 for a total payable of $1,534,500 See Note 1 (J).

 

(B) Loan Payable – Related Party  

 

On September 17, 2015, the Company received $170,000 from a related party. Pursuant to the terms of the note, the note is bearing an original issuance discount in the amount of $10,000 and is due on or before October 31, 2015. As of December 31, 2015, the balance of the note was repaid and remaining balance is $0.

 

 
 

(C) Convertible Debt

 

During the three months ended March 31, 2016 and the year December 31, 2015, the Company issued convertible notes totaling $1,345,772 and $5,390,789, respectively.

 

On October 7, 2015, the Company issued 1,000,000 warrants in connection with the entry into certain convertible debenture agreements. Warrant vests immediately and expire on October 7, 2018 with an exercise price of $0.12.

 

On October 26, 2015, the Company issued 1,000,000 warrants in connection with the entry into certain convertible debenture agreements. Warrant vests immediately and expire on October 26, 2018 with an exercise price of $0.12.

 

The Convertible notes issued for year ended March 31, 2016 and year ended December 31, 2015, consist of the following terms:

 

        Three months ended   Year ended
        March 31, 2016   December 31, 2015
        Amount of   Amount of
        Principal Raised   Principal Raised
Interest Rate         0% - 10%       0% - 10%  
Default interest rate         14% - 22%       14% - 22%  
Maturity         February 26, 2015 - November 23, 2017       February 26, 2015 - November 23, 2017  
                     
Conversion terms 1   65% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion.     3,000,000       2,104,000  
Conversion terms 2   65% of the “Market Price”, which is the lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion.     334,046       420,410  
Conversion terms 3   70% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the fifteen (15) trading day period prior to the conversion.     111,111       111,111  
                     
Conversion terms 4   75% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion.     787,778       78,778  
Conversion terms 5   60% of the “Market Price”, which is the lowest trading prices for the common stock during the fifteen  (15) trading day period prior to the conversion.     —         35,000  
Conversion terms 6   Conversion at $0.10 per share     —         135,200  
Conversion terms 7   60% of the “Market Price”, which is the lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion.     —         282,000 
Conversion terms 8   65% of the “Market Price”, which is the two lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion.     351,825       390,778   
Conversion terms 9   65% of the “Market Price”, which is the two lowest trading prices for the common stock during the fifteen (15) trading day period prior to the conversion.     —         150,250  
Conversion terms 10   65% of the “Market Price”, which is the lowest trading prices for the common stock during the fifteen (15) trading day period prior to the conversion.     218,325       218,325  
    Convertible Debt     4,803,083       4,634,852  
    Less: Debt Discount     (2,634,001 )     (2,658,213 )
    Convertible Debt - net     2,169,082     $ 1,976,639  

 

 

The debt holders are entitled, at their option, to convert all or part of the principal and accrued interest into shares of the Company’s common stock at conversion prices and terms discussed above.    The Company classifies embedded conversion features in these notes and warrants as a derivative liability due to management’s assessment that the Company may not have sufficient authorized number of shares of common stock required to net-share settle or due to the existence of a ratchet due to an anti-dilution provision. See Note 4 regarding accounting for derivative liabilities.

 
 

 

During the three months ended March 31, 2016, the Company converted debt and accrued interest, totaling $794,578 into 292,401,355 shares of common stock

 

During the year ended December 31, 2015, the Company converted debt and accrued interest, totaling $2,918,633 into 154,673,471 shares of common stock.    

  

Convertible debt consisted of the following activity and terms:

 

    Three Months Ended March 31, 2016
Borrowings during the three months ended March 31, 2016; between 4% - 10%     4,634,852  
         
Non-Cash Reclassification of accrued interest converted     47,080  
         
Repayments     (294,840 )
         
Conversion of debt to into 154,673,471 shares of common stock with a valuation of $2,918,633 ($0.017 - $0.042/share) including the accrued interest of $47,080     (794,580 )
         
Reclassification of convertible into demand note     (135,200 )
         
         
      3,457,312  

 

  (D) Debt Issue Costs

 

During the three months ended March 31, 2016, the Company paid debt issue costs totaling $21,737.

 

The following is a summary of the Company’s debt issue costs:

 

    Three Months Ended   Three Months Ended
    March 31, 2016   March 31, 2015
                 
Debt issue costs   $ 185,113       221,693  
Accumulated amortization of debt issue costs     (161,144 )     (184,960 )
                 
Debt issue costs - net   $ 23,969       34,733  

 

 

During the three months ended March 31, 2016 and 2015 the Company amortized $34,468 and $17,361 of debt issue costs, respectively.

 

(E) Debt Discount & Original Issue Discount

 

During the three months ended March 31, 2016 and December 31, 2015, the Company recorded debt discounts totaling $5,323,857 and $5,323,857, respectively.

 

The debt discount and the original issue discount recorded in 2016 and 2015 pertains to convertible debt that contains embedded conversion options that are required to bifurcated and reported at fair value and original issue discounts.

 

The Company amortized $1,338,958 and $919,760 during the three months ended March 31, 2016 and 2015, respectively, to amortization of debt discount expense.

 

    Three Months Ended   Three Months Ended
    March 31, 2016   March 31, 2015
                 
Debt discount   $ 8,357,668       2,532,438  
Accumulated amortization of debt discount     (5,723,667 )     (953,494 )
                 
Debt discount - Net   $ 2,634,001       1,578,944  
                 

 

NOTE 4           DERIVATIVE LIABILITIES

 

The Company identified conversion features embedded within convertible debt issued in 2016 and 2015 and warrants issued in 2016 and 2015. The Company has determined that the features associated with the embedded conversion option should be accounted for at fair value as a derivative liability.

 

As a result of the application of ASC No. 815, the fair value of the conversion feature is summarized as follow:

 

Derivative Liability - December 31, 2015        
Fair value at the commitment date for convertible instruments        
Fair value at the commitment date for warrants issued        
Change in fair value of embedded derivative liability for warrants issued        
Change in fair value of embedded derivative liability for convertible instruments     2,479,427  
Reclassification to additional paid in capital for financial instruments that ceased to be a derivative liability     (776,399 )
Change from repayment   $ 3,684,084  
Derivative Liability -March 31, 2016        

    

The Company recorded the debt discount to the extent of the gross proceeds raised, and expensed immediately the remaining value of the derivative as it exceeded the gross proceeds of the note. The Company recorded a derivative expense for the three months ended March 31, 2016 and 2015 of $2,081,092 and $167,523, respectively.

 

The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of March 31, 2016:

 

      Commitment Date       Re-measurement Date  
                 
Expected dividends:     0 %     0 %
Expected volatility:     133% - 262%       150% -360.32%  
Expected term:     0.41 - 3 Years       0.12–2.96 Years  
Risk free interest rate:     0.06% - 1.31%       0.04% - .1.31%  

  

The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions as of December 31, 2015:

 

      Commitment Date       Re-measurement Date  
                 
Expected dividends:     0 %     0 %
Expected volatility:     133% - 221%       177% -238.77%  
Expected term:     0.41 - 3 Years       0.12–2.9 Years  
Risk free interest rate:     0.06% - 1.31%       0.12% - .1.31%  

 

 
 

 

NOTE 5           PROPERTY AND EQUIPMENT

 

At March 31, 2016 and December 31, 2015, respectively, property and equipment is as follows:

 

    March 31, 2016   December 31, 2015
                 
Website Development   $ 294,795     $ 294,795  
Furniture and Equipment     113,820       112,220  
Leasehold Improvements     6,573       6,573  
Software     54,597       53,897  
Music Equipment     2,578       2,578  
Office Equipment     80,710       80,110  
Domain Name     1,500       1,500  
Sign     628       628  
Total     552,201       552,301  
Less: accumulated depreciation and amortization     (441,503 )     (421,340 )
Property and Equipment, Net   $ 113,698     $ 130,961  

 

Depreciation/amortization expense for the three months ended March 31, 2016 and 2015 totaled $20,164 and $26,464, respectively.

 

NOTE 6          STOCKHOLDERS’ EQUITY

 

On March 4, 2015, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors created and authorized the issuance of Series A Convertible Preferred stock, with a par value of $0.00001 per share. The face amount of state value of each Preferred Share of stock is $0.96.

 

On June 24, 2015, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors filed with the State of Delaware an Amended Certificate of Incorporation increasing the authorized shares of common stock by 120,000,000 shares of common stock from 450,000,000 million shares of common stock to 570,000,000 shares of common stock.

 

On August 19, 2015, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors filed with the State of Delaware an Amended Certificate of Incorporation increasing the authorized shares of common stock by 280,000,000 shares of common stock from 570,000,000 million shares of common stock to 850,000,000 shares of common stock.

 

On January 13, 2016, the Company with the consent of the Majority Shareholder and Unanimous Written Consent of the Board of Directors filed with the Securities and Exchange Commission a Schedule 14C and with the State of Delaware an Amended Certificate of Incorporation increasing the authorized shares of common stock by 800,000,000 shares of common stock from 850,000,000 million shares of common stock to 1,650,000,000 shares of common stock.

 

(A) Common Stock  

 

During the three months ended March 31, 2016, the Company issued the following common stock:

 

Transaction Type   Quantity   Valuation   Range of Value per share
                         
Conversion of convertible debt and accrued interest     292,401,355     $ 794,578       $0.0016 to- $0.0009  
Services - rendered     12,000,000       105,600       $0.12-$0.009  
Total shares issued     304,401,355     $ 900,178          
                         

 

During the year ended December 31, 2015, the Company issued the following common stock:

 

Transaction Type   Quantity   Valuation   Range of Value per share
                         
Conversion of convertible debt and accrued interest     154,673,471     $ 2,918,633       $0.009 - $0.042  
Services - rendered     9,195,182       294,548       $0.12-$0.07  
Return of shares     (120,000,000 )     (1,200 )   $ 0.000010  
Conversion of line of credit in common stock     5,000,000       150,000     $ 0.03  
Total shares issued     48,868,653     $ 3,361,981          
                         

 

 The following is a detailed description of transactions noted above:

 

1. Conversion of convertible debt and accrued interest

 

During the three months ended March 31, 2016, the Company converted debt and accrued interest, totaling $794,578 into 292,401,355 shares of common stock.

 

 
 

 

2. Services Rendered

 

During the three months ended March 31, 2016, the Company issued 12,000,000 shares of common stock to employee having a fair value of $105,600 ($0.009/sh.) in exchange for services.

 

During the year ended December 31, 2015, the Company issued 200,000 shares of common stock having a fair value of $14,000 ($0.070/sh.) in exchange for consulting services.

 

During the year ended December 31, 2015, the Company issued 200,000 shares of common stock having a fair value of $10,000 ($0.050/sh.) in exchange for consulting services.

 

During the year ended December 31, 2015, the Company issued 2,246,858 shares of common stock having a fair value of $53,925 ($0.012/sh.) in exchange for consulting services.

 

During the year ended December 31, 2015, the Company issued 200,000 shares of common stock having a fair value of $8,000 ($0.040/sh.) in exchange for consulting services.

 

On December 21, 2015, the Company issued 100,000 shares of common stock having a fair value of $2,000 ($0.020/sh.) in exchange for consulting services.

 

On November 23, 2015, the Company issued 200,000 shares of common stock having a fair value of $6,000 ($0.030/sh.) in exchange for consulting services.

 

On September l1, 2015, the Company issued 1,000,000 shares of common stock to employee having a fair value of $23,800 ($0.024/sh.) in exchange for services.

 

On September 10, 2015, the Company issued 2,048,324 shares of common stock having a fair value of $62,679($0.031/sh.) in exchange for legal services of 138,433. This resulted in a gain on settlement of $75,954.

 

On May 4, 2015, the Company issued 200,000 shares of common stock having a fair value of $10,700 ($0.054/sh) in exchange for consulting services.

 

On April 1, 2015, the Company issued 150,000 shares of common stock having a fair value of $4,455 ($0.0284/sh) in exchange for consulting services.

 

On April 1, 2015, the Company issued 150,000 shares of common stock having a fair value of $4,455 ($0.0284/sh) in exchange for consulting services.

 

On April 1, 2015, the Company issued 300,000 shares of common stock having a fair value of $8,910 ($0.0284/sh) in exchange for consulting services.

 

On March 1, 2015, the Company issued 375,000 shares of common stock to employees having a fair value of $20,725 ($0.040 – 0.063) in exchange for services.

 

On February 28, 2015, the Company entered into a services agreement. In connection with this agreement, the consultant will receive 700,000 shares of fully vested common stock.

 

3. Return of Shares and Issuance of Preferred shares

 

On March 4, 2015 the Company filed a form 8K with the SEC associated with the Company entering into a Securities Exchange Agreement and the Company filing with the Secretary of State Delaware a Certificate of Designations, Preferences and Rights whereby, among other things, the Company for good and valuable consideration, agreed that in consideration of a large shareholder exchanging 120,000,000 shares of common stock back to the Company, the shareholder would receive 5,000,000 shares of Series A Convertible Preferred Stock of the Company at a Stated Value of $0.96 per share and a Conversion Price of $0.04 per share. The Series A Convertible Preferred Stock carries certain voting preferences and will accrue dividends at a rate of 8% per annum Stated Value, payable in cash or in kind at the election of the Board of Directors. For the year ended December 31, 2015, the Company has not declared dividends.

 

4. Conversion of line of credit into Common shares

 

On April 1, 2015, the principal stockholder converted $150,000 of the line of credit owed into 5,000,000 shares of common stock at $0.03 per share.


 (B) Stock Warrants

    

On March 6, 2016, the Company entered into a revised engagement with its corporate counsel, McMenamin Law Group, for corporate legal services to be provided by legal counsel beginning July 28, 2015 through December 31, 2016, pursuant to which the Company has agreed to issue a five (5) warrant at an exercise price totaling $25,000.00 at a strike price of ($0.0029/share) per share of common stock of the Company, which share price was the closing price of the Company’s stock on March 3, 2016. In addition the Company has agreed to pay McMenamin Law Group cash consideration totaling $15,000.00 on or before March 31, 2016, or a funding of the Company, whichever occurs first. This new engagement shall replace and supersede any previous engagements or other agreements between the Company and McMenamin Law Group.

 

 
 

 

On February 29, 2016, the Company has agreed to issue 2,000,000 three-year warrants at an exercise price of $0.01/share of the common stock of the Company to a consultant for consulting services.

 

On January 5, 2016, the Company increased the warrant issuance to a consultant from November 25, 2014, from 200,000 warrants to 2,800,000 warrants. The warrants vested immediately. The 2,000,000 have an exercise price of $0.02 per share. The 800,000 have an exercise price of $$0.06 per share and contingent on the Common Stock on market price per share at $0.05 per share or higher for 30 or more consecutive days at the time of purchase. The company will record the fair value of the warrants based on the fair value of each warrant grant estimated on the date of grant using the black – Scholes option pricing model.

 

On October 7, 2015, the Company issued 1,000,000 warrants in connection with the entry into certain convertible debenture agreements. Warrant vests immediately and expires on October 7, 2018 with an exercise price of $0.12.

 

On October 26, 2015, the Company issued 1,000,000 warrants in connection with the entry into certain convertible debenture agreements. Warrant vests immediately and expires on October 26, 2018 with an exercise price of $0.12.

 

The following tables summarize all warrant grants as of March 31, 2016, and the related changes during these periods are presented below:

 

    Number of Warrants   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life (in Years)
  Balance, December 31, 2015       5,550,000     $ 0.25       1.5  
                             
  Granted       13,420,690     $ —            
  Exercised       —       $ —            
  Cancelled/Forfeited       (700,000 )   $ —            
  Balance, March 31, 2016       18,270,690     $ 0.30       2.5  

  

 A summary of all outstanding and exercisable warrants as of March 31, 2016 is as follows:

 

            Weighted Average    
Exercise   Warrants   Warrants   Remaining   Aggregate
Price   Outstanding   Exercisable   Contractual Life   Intrinsic Value
                                     
$ 0.01       2,000,000       2,000,000       2.92     $ —    
$ 0.02       2,000,000       2,000,000       2.76     $ —    
$ 0.0029       8,620,690       8,620,690       3.00       —    
$ 0.06       800,000       800,000       2.76          
$ 0.12       2,000,000       2,000,000       2.52     $ —    
$ 0.40       2,850,000       2,850,000       0.56     $ —    
                                     
          18,270,690       18,270,690       2.5     $ —    

 

A summary of all outstanding and exercisable warrants as of December 31, 2015 is as follows:

 

                          Weighted Average          
  Exercise       Warrants       Warrants       Remaining       Aggregate  
  Price       Outstanding       Exercisable       Contractual Life       Intrinsic Value  
                                     
$ 0.10       200,000       200,000       1.90     $ —    
$ 0.12       2,000,000       2,000,000       2.77     $ —    
$ 0.40       2,850,000       2,850,000       0.73     $ —    
$ 0.45       500,000       500,000       —       $ —    
                                     
          5,550,000       5,550,000       1.5 years     $ —    

 

 
 

(C) Stock Options

 

The following tables summarize all option grants as of March 31, 2016, and the related changes during these periods are presented below:

 

    Number of Options   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life
(in Years)
             
Outstanding - December 31, 2015     15,566,652       0.13       1.32  
Granted     —         —         —    
Exercised     —         —         —    
Forfeited or Canceled     (12,700,000 )     —         —    
Outstanding – March 31, 2016     2,866,652       0.13       1.27  
Exercisable - March 31, 2016     2,866,652                  

 

NOTE 7         COMMITMENTS

 

(A) Employment Agreement

 

On September 11, 2015, the Company executed an employment agreement with an employee. The term of the agreement is for three years.   As compensation for services, the employee will receive a monthly compensation of $12,000.  In addition, the employee will receive up to 2,000,000 shares of common stock. The first 1,000,000 shares will be paid upon execution of Agreement. For the year ended December 31, 2015, the Company recorded $23,800 in expense for 1,000,000 shares of common stock at ($0.024/share) based on the trading price. The second 1,000,000 shares will be paid in month 13 of the agreement in lieu of the $12,000 that would be paid in that month. For the year ended December 31, 2015, the Company recorded $23,800 in stock based compensation payable for 1,000,000 shares of common stock at ($0.024/share) based on the trading price.

 

On January 8, 2

 

On March 6, 2016, the Company entered into a revised engagement with its corporate counsel, McMenamin Law Group, for corporate legal services to be provided by legal counsel beginning July 28, 2015 through December 31, 2016, pursuant to which the Company has agreed to issue a five (5) warrant at an exercise price totaling $25,000.00 at a strike price of ($0.0029/share) per share of common stock of the Company, which share price was the closing price of the Company’s stock on March 3, 2016. In addition the Company has agreed to pay McMenamin Law Group cash consideration totaling $15,000.00 on or before March 31, 2016, or a funding of the Company, whichever occurs first. This new engagement shall replace and supersede any previous engagements or other agreements between the Company and McMenamin Law Group.

 

On June 11, 2015, the Company entered into a consulting services agreement with two consultants. The agreement will continue until September 10, 2015. In connection with this agreement, the consultant shall be paid $6,000 per month and receive up to 100,000 shares of common stock each upon completion, submission and approval of the first stage of working APP. An additional 100,000 shares will be issued upon the completion, submission and approval of the second stage, working APP. As of December 31, 2015, the Company recorded $2,000 in stock based compensation for 100,000 shares of common stock at ($0.02/share) based on the trading price. No additional shares will be issued to the consultant’s due to the non-performance of services.

 

On May 4, 2015, the Company entered into a consulting services agreement. The agreement will remain in effect for three years. In connection with this agreement, the consultant shall be paid $7,500 per month and receive 200,000 shares of common stock upon the execution of the agreement. An additional 200,000 shares of common still will be grated within 10 days of achieving each of the following milestones, whichever comes first, up to one million shares of stock based on marketing goals. On July 2, 2015, the Company issued 200,000 shares of common stock having a fair value of $ 10,700 ($0.0535/sh) in exchange for consulting services agreement dated May 4, 2015.

 

 
 

On January 21, 2015, the Company entered into a consulting services agreement. In connection with this agreement, the consultant shall be paid $4,000 per month and receive up to 150,000 shares of common stock payable in lots of 50,000 per month and will be issued 90 days after the date of the signing of the agreement. For year ended December 31, 2015, the Company recorded $4,455 in stock based compensation.

 

On January 21, 2015, the Company entered into a consulting services agreement. In connection with this agreement, the consultant shall be paid $4,000 per month and receive up to 150,000 shares of common stock payable in lots of 50,000 per month and will be issued 90 days after the date of the signing of the agreement. For the year ended December 31, 2015, the Company recorded $4,455 in stock based compensation.

 

On March 17, 2015, the Company entered into a services agreement. In connection with this agreement, the consultant will receive 300,000 shares of fully vested common stock, payable in lots of 100,000 shares of common stock per month and 5,000 per month. The agreement will continue until June 17, 2015. For year ended December 31, 2015, the Company recorded $8,910 in stock based compensation.

 

On February 18, 2015, the Company entered into service agreement for a period of two years with the Company’s transfer agent for a period from September 23, 2014 to September 23, 2016. In consideration for these services, during the year ended December 31, 2015, 700,000 shares of fully vested common stock valued at $22,400 ($0.03/share) were granted.

 

NOTE 8       LITIGATION

 

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business.

 

On January 21, 2015, the Company filed a patent infringement action against Netflix Inc., Netflix Luxembourg S.a.r.l. and Netflix International B.V. with the District Court of Mannheim, Germany. The asserted patent is the same patent as in the German proceedings against Google Inc. and its subsidiaries. The Complaint alleges that Netflix Inc. and its subsidiaries are offering and transmitting video streams to German customers as part of their video-on-demand business model; the videos being encoded and transmitted in a manner claimed and protected by the patent. The Company primarily seeks a permanent injunction against the Defendants, plus damages and information regarding past infringements. The Company, upon advice of counsel, decided withdraw the litigation prior to oral argument, which withdrawal is without prejudice to re-file the lawsuit in the future.

 

The Company intends to vigorously prosecute these various patent infringement litigations. The Company believes it has a good likelihood of success associated with these patent infringement lawsuits. However, no assurance can be given by the Company as to the ultimate outcome of these actions or its effect on the Company. The law firm is prosecuting this action on a pure contingency fee basis.

 

On January 26, 2015, the Company was named as a defendant in an action filed in the Superior Court for the State of California and the County of Los Angeles captioned Bibicoff Family Trust v. Max Sound Corporation (Case No. SC123679). In the complaint the plaintiff alleges a cause of action for breach of contract associated with the non-payment by the Company for certain services plaintiff agreed to provide to the Company. The Company interposed a cross-complaint against plaintiffs averring causes of action for breach of contract, fraud, and negligent misrepresentation by defendants with respect to defendants’ fraudulent and intentional undisclosed inability to perform the services that plaintiffs’ agreed to perform that are the subject of this dispute The parties recently participated in a mediation and have arrived at a settlement and resolution of the matter. The Company agreed in connection with the settlement to pay Bibicoff Trust $100,000 over a 13 month installment period commencing March 10, 2016, with the caveat that such settlement amount will be reduced to $93,000.00 in the event the Company pays $20,000.00 on or before March 10, 2016, which the Company successfully achieved thus reducing the settlement amount to $93,000.00.

 

On May 13, 2015 Google's “motion to dismiss” was denied by the Northern District of California court in a seven page order, stating that Max Sound had sufficiently alleged the existence and validity of the '339 Patent.

 

On June 11, 2015, the District Court of Mannheim announced it had scheduled the hearing in the video streaming patent case against Google and YouTube for December 8, 2015; however, at the oral argument hearing the Company, upon advice of counsel, determined that it was in the Company’s best interests to withdraw the action such that it cannot be re-filed against the same parties. The case was filed by Max Sound against Google Inc., Mountain View, USA, Google Commerce Ltd., Dublin, Ireland, Google Germany GmbH, Hamburg, Germany, and the Google subsidiary YouTube LLC, San Bruno, USA, in December 2014 because of the infringement of a video streaming patent, which is valid for the world's most important markets. Max Sound requested the German court to order Google and YouTube to stop streaming video via using the current VP8 or H.264 video codecs and to stop selling video-enabled devices like Nexus Phones and Chromecast sticks. Further requests are that information about any profits is rendered and that Google and YouTube are declared liable for damages based on patent infringement. Max Sound claims that Google and YouTube are using the technology protected by European Patent EP 2 026 277, which allows far more economically efficient transport of digital content due to greatly optimized data capacity.

 

MaxD v. VSL, et al. This is an arbitration action brought by the Company against VSL Communications, Ltd., Vedanti Systems, Ltd., Constance Nash, Robert Newell and eTech Investments as respondents before the American Arbitration Association for breach of contract, fraud, and other causes of action. Google filed a motion to dismiss the litigation based upon the argument that that the Company’s underlying agreement with VSL did not confer on the Company legal standing to pursue the patent infringement claims against Google. On November 24, 2015 the Court granted the motion to dismiss in favor of Google. The Company timely filed it notice of appeal with the appeals court on February 22, 2016. The two issues on appeal are, (i) whether the district court erred by granting the Google defendants’ motion to dismiss the Company’s lawsuit on the ground that the Company lacked standing to sue the Google defendants for infringement of the 339 patent, and (ii) whether the district court erred by denying the Company’s motion for leave to amend the complaint and add as a party VSL, a former licensee of the 339 patent to cure any defect in prudential standing to the extent VSL is a necessary party. As noted

herein, this finding by the Court was appealed to the Federal Circuit court of Appeals on February 22, 2016. The Circuit Court docketed the appeal on February 24, 2016, and the parties will be briefing the appeal during the next several months.. Subsequently, the Company has pursued successfully in arbitration claims against VSL to legally enforce the agreement and to compel VSL to comply with the agreement’s terms and conditions that inter alia VSL must fully cooperate with the Company to cure any issues the Court raised with standing to pursue the claims. This arbitration is still ongoing.

 

Attia v. Google and Flux Factory. As of December 31, 2015:  Defendants had filed a demurrer to the complaint.  The demurrer was pending as of December 31, 2015. Current status:  On February 1, 2016, the court granted in part and denied in part the demurrer and provided plaintiff leave to amend the complaint to cure certain deficiencies.  The amended complaint was filed on February 8, 2016.  The case is set for scheduling conference on May 6, 2016 after which the case should proceed to the discovery phase.

 

No assurance can be given as to the ultimate outcome of these actions or its effect on the Company.  

 

NOTE 9        INTANGIBLE ASSETS

 

As of March 31, 2016 and December 31, 2015 the Company owns certain trademarks and technology rights.    See Note 1 (I).

 

    Useful Life   Three Months Ended March 31, 2016   December 31, 2015
                     
Distribution rights   10 Years   $ 9,647,577     $ 9,647,577  
Trademarks   Indefinite     7,500,000       7,500,000  
Licensing Rights   Indefinite     2,064,000       2,064,000  
Other   Indefinite     275       275  
Accumulated amortization         (2,443,810 )     (2,415,615 )
Impairment of the distributions rights         (15,703,616 )     (15,703,616 )
                     
Net carrying value       $ 1,064,426     $ 1,092,621  
                     

  

 

For the three months ended March 31, 2016 and 2015, amortization expense related to the intangibles with finite lives totaled $28,195and $263,590, respectively, and was included in general and administrative expenses in the statement of operations.  The Company also recorded an impairment expense of $15,703,617 for the year ended December 31, 2015.

 

NOTE 10       SUBSEQUENT EVENTS

 

Through the filing of these financial statements, the Company converted a total of $191,952 in convertible debt comprised of principal and accrued interest into 78,938,924 common shares.

 

On April 4, 2016 the Company repaid $116,667 in convertible notes to JMJ Financial.

 

On April 5, 2016 the Company repaid $486,000 in convertible notes to Iliad Research and Trading LP

 

On April 6, 2016, the Company entered into an agreement with Iliad Research and Trading to issue up to $171,665 in a convertible note. The note matures on April 6, 2017 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the “Market Price”, which is the average of the lowest two (2) trading prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months. The Company received $150,000 proceeds on April 6, 2016.

 

On April 8, 2016, the Company entered into an agreement with The Vechery Family Trust to issue up to $2,000,000 in a convertible note. For the three months ended the Company received $1,000,000 and on April 8, 2016 the Company received $600,000 for a total of $1,600,000. The note matures on April 8, 2017 and bears an interest charge of 8%. The conversion price equals the “Variable Conversion Price”, which is 65% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion. The holder of the note has a right to convert all or any part of the outstanding unpaid principal amount into shares of common stock after six months.

 

On April 11, 2016 the Company repaid $335,808 in convertible notes to Bay Private Equity, Inc. The note was dated October 31, 2015 with a principal balance of $218,325.

 

On April 12, 2016 the Company repaid $111,000 in convertible notes to Rock Capital. The notes was dated February 23, 2016 with a principal balance of $46,316 and March 7, 2016 with a principal balance of $32,000.

 

ITEM 2.       Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The following plan of operation provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.

 

 
 

 

Overview

 

Max Sound Corporation (“we,” “us,” “our,” or the “Company”) was incorporated in the State of Delaware on December 9, 2005 as 43010, Inc. to engage in any lawful corporate undertaking, including, but not limited to, locating and negotiating with a business entity for combination in the form of a merger, stock-for-stock exchange or stock-for-assets exchange. On October 7, 2008, pursuant to the terms of a stock purchase agreement, Mr. Greg Halpern purchased a total of 100,000 shares of our common stock from Michael Raleigh for an aggregate of $30,000 in cash. The total of 100,000 shares represents 100% of our issued and outstanding common stock at the time of the transfer. As a result, Mr. Halpern became our sole shareholder. As part of the acquisition, and pursuant to the Stock Purchase Agreement, Michael Raleigh, our then President, CEO, CFO, and Chairman resigned from all the positions he held in the company, and Mr. Halpern was appointed as our President, CEO CFO and Chairman. The original business model was developed by Mr. Halpern in September of 2008 and began when he joined the Company on October 7, 2008. In October 2008, we became a development stage company focused on creating an Internet search engine and networking web site. 

 

From October 2008 until January 17, 2011, Mr. Halpern was our CEO, and during that time the Company was focused on developing their Internet search engine and networking web site. In January of 2010, the Company launched their Internet search engine and networking website.  In 2011, the Company decided to abandon its social networking website.  On May 11, 2010, the Company acquired the worldwide rights, title, and interest to all fields of use for MAX-D.

 

On January 17, 2011, Mr. Halpern resigned as the Company’s CEO and John Blaisure was appointed as CEO.  In February of 2011, the Company elected to change its business operations and focus primarily on developing and launching the MAX-D technology.  Our current website (www.maxsound.com) is used to showcase the MAX-D technology.  On March 8, 2011, the Company changed its name to Max Sound Corporation, and its trading symbol on the OTC Bulletin Board to MAXD.

  

MAX Sound Corporation owns the worldwide rights to all fields of use to MAX-D HD Audio, which was invented by Lloyd Trammell, a top sound designer and audio engineer who helped develop and sell the first working Surround Sound System to Hughes Aircraft.  Mr. Trammell, also developed MIDI for Korg and owns five patents in dimensional sound processing.  We believe that MAX-D is to Audio what High Definition is to Video.  MAX-D works by converting all audio files to their highest possible acoustically perfect equivalent without increasing files size or bandwidth usage.

 

On May 22, 2014, MAXD entered into a representation agreement with architect Eli Attia giving MAXD the exclusive rights to sue violators of Eli Attia’s intellectual property rights. MAXD has since filed suit against Google, Inc., Flux Factory, and various executives of these companies for misappropriation of trade secrets.

  

No later than June 20, 2014, MAXD entered into a representation agreement with VSL Communications, Inc., making MAXD the exclusive agent to VSL to enforce all rights with respect to patented technology owned and controlled by VSL. In particular, the Company announced that it had acquired a worldwide license and representation rights to a patented video and data technology “Optimized Data Transmission System and Method” which enables end-user licensees to transport 100% of data bandwidth content in only 3% of the bandwidth with the identical lossless quality. Significantly, this represents thirty three times reduction associated with transport cost and the time it takes for the video or digital content to be viewed by an end-user. As described more fully in the Legal Proceedings Section, The Company has since filed suit against Google, Inc., YouTube, LLC, and On2 Technologies, Inc., alleging willful infringement of the patent.

 

On June 20, 2015, the Company entered into a license agreement with Santok LTD of United Kingdom (“Santok). The term of the agreement is three years. Santok will pay the Company a royalty fee of $1.50 for each licensed product. Santok guarantees to the Company a minimum total of 150,000 cumulative licensed product installation with a minimum total guaranteed value of $225,000 over the three years of the agreement. If the total royalty paid is less than the guaranteed value, Santok will pay the difference.

 

On July 13, 2015, the Company entered into a license agreement with Luna Mobile, Inc. of United States (“Luna). The term of the agreement is three years. Luna will pay the Company a royalty fee of $1.50 for each licensed product manufactured and sold.

 

Plan of Operation

  

The Company believes that Max Sound HD Audio Technology is a game changer for several vertical markets whose demand will create revenue opportunities in 2016.

 

We expect our financial requirements to increase with the additional expenses needed to market and promote the MAX-D HD Audio Technology.  We plan to fund these additional expenses through financings and through loans from our stockholders and/or officers based on existing lines of credit and we are also considering various private funding opportunities until such time that our revenue stream is adequate enough to provide the necessary funds. 

 

Results of Operations

  

The following tables set forth key components of our results of operations for the periods indicated, in dollars, and key components of our revenue for the period indicated, in dollars.

 

For the three months ended March 31, 2016 and 2015:

 

 
 

 

    For the Three Months Ended,
    March 31, 2016   March 31, 2015
         
         
Revenue   $ —       $ —    
                 
                 
Operating Expenses                
General and administrative     544,524       787,303  
Consulting     69,690       69,837  
Professional fees     109,920       117,624  
Website development     21,000       5,000  
Compensation     212,000       241,300  
Total Operating Expenses     957,134       1,221,064  
                 
Loss from Operations     (957,134 )     (1,221,064 )
                 
Other Income / (Expense)                
Other income     35,207       —    
Loss on inventory write off     —         (29,275 )
Interest expense     (89,460 )     (56,443 )
Derivative Expense     (2,081,092 )     (167,523 )
Amortization of debt offering costs     (34,468 )     (53,093 )
Loss on conversions     (99,394 )     —    
Amortization of debt discount     (1,338,958 )     (919,760 )
Change in fair value of embedded derivative liability     (2,476,063 )     473,735  
      (6,084,228 )     (752,359 )
Total Other Income / (Expense)                
      —         —    
Provision for Income  Taxes                
    $ (7,041,362 )   $ (1,973,423 )
Net Loss                
    $ (0.01 )   $ (0.01 )
Net Loss Per Share  - Basic and Diluted                
                 
Weighted average number of shares outstanding during the year Basic and Diluted     583,890,510       341,970,037  
                 

 

General and Administrative Expenses: Our general and administrative expenses were 544,524 for the three months ended March 31, 2016 and $787,303 for the three months ended March 31, 2015, representing a decrease of $242,779, or approximately 31%, as a result of decrease in the general operation of the Company included added personnel, product development and marketing of our Max Sound Technology.

 

Consulting Fees:  Our consulting fees were $69,690 for the three months ended March 31, 2016 and $69,837 for the three months ended March 31, 2015, representing a decrease of $147, or approximately 0.21%. The Company has decreased the use of consultants to assist the Company.

 

Professional Fees: Our professional fees were $109,920 for the three months ended March 31, 2016 and $117,624 for the three months ended March 31, 2015, representing an decrease of $7,704 or approximately 7%, as a result of ongoing litigation.

 

Compensation: Our compensation expenses were $212,000 for the three months ended March 31, 2016 and $241,300 for the three

 
 

months ended March 31, 2015, representing a decrease of $29,300, or approximately 12%, as a result of our expensing of monthly compensation to our management and employees.

 

Net Loss: Our net loss for the three months ended March 31, 2016 was $7,041,362. While the operational expenses in marketing our Max Sound technology decreased from the same period of last year, the overall amount of our net loss substantially increased as a result of an increase in the change in the fair value of embedded derivative liability associated with the convertible debt and the impairment of the intangible asset.

 

Liquidity and Capital Resources

 

Revenues for the three months ended March 31, 2016 and 2015, were $0 and $0, respectively. We have an accumulated deficit of 70,336,394 for the period from December 9, 2005 (inception) to March 31, 2016, and have negative cash flow from operations of $531,507 for the three months ended March 31, 2016.  

 

Our financial statements have been presented on the basis that it is a going concern, which contemplates the realization of revenues from our subscriber base and the satisfaction of liabilities in the normal course of business. We have incurred losses from inception. These factors raise substantial doubt about our ability to continue as a going concern.

 

From our inception through March 31, 2016, our primary source of funds has been the proceeds of private offerings of our common stock, private financing, and loans from stockholders.  Our need to obtain capital from outside investors is expected to continue until we are able to achieve profitable operations, if ever. There is no assurance that management will be successful in fulfilling all or any elements of its plans.  

 

Below is a summary of our capital-raising activities for the three months ended March 31, 2016:

 

During the three months ended March 31, 2016 and December 31, 2015, the Company issued convertible notes totaling $1,345,772 and $5,390,789, respectively. The Convertible notes issued for three months ended March 31, 2016 and year ended December 31, 2015, consist of the following terms:

 

 

          Three months ended March 31, 2016       Year ended December 31, 2015  
           Amount of Principal Raised       Amount of  Principal Raised  
Interest Rate         0% - 10%       0% - 10%  
Default interest rate         14% - 22%       14% - 22%  
Maturity         February 26, 2015 - November 23, 2017       February 26, 2015 - November 23, 2017  
                     
Conversion terms 1   65% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion.     3,000,000       2,104,000  
Conversion terms 2   65% of the “Market Price”, which is the lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion.     334,046       420,410  
Conversion terms 3   70% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the fifteen (15) trading day period prior to the conversion.     111,111       111,111  
                     
Conversion terms 4   75% of the “Market Price”, which is the average of the lowest three (3) trading prices for the common stock during the ten (10) trading day period prior to the conversion.     787,778       78,778  
Conversion terms 5   60% of the “Market Price”, which is the lowest trading prices for the common stock during the fifteen  (15) trading day period prior to the conversion.     —         35,000  
Conversion terms 6   Conversion at $0.10 per share     —         135,200  
Conversion terms 7   60% of the “Market Price”, which is the lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion.     —         282,000-     
Conversion terms 8   65% of the “Market Price”, which is the two lowest trading prices for the common stock during the ten (10) trading day period prior to the conversion.     351,825       390,778-     
Conversion terms 9   65% of the “Market Price”, which is the two lowest trading prices for the common stock during the fifteen (15) trading day period prior to the conversion.     —         150,250  
Conversion terms 11   65% of the “Market Price”, which is the lowest trading prices for the common stock during the fifteen (15) trading day period prior to the conversion.     218,325       218,325  
    Convertible Debt     4,803,083       4,634,852  
    Less: Debt Discount     (2,634,001 )     (2,658,213 )
    Convertible Debt - net   $ 2,169,082     $ 1,976,639  

 

 
 

 

Loans and Advances

 

We have entered into three Credit Line Agreements with Greg Halpern.  The first two were for $100,000 each and matured and expired in 2011.  The third Credit Line Agreement issued by Mr. Halpern in March 2010 is for an additional $500,000 and matured and expired in 2012.  All three agreements accrue interest at the prime rate as of the date of issuance.  The prime rate of interest is the rate of interest that major banks charge their most creditworthy customers.  For the purposes of these agreements, we shall determine the prime rate by using the prime rate reported by the Wall Street Journal on the date funds are extended to the Company.  Based on the prime rate as of the date of issuance, the prime rate shall be 3.25%. On September 26, 2013, we entered into a Credit Line Agreement with Mr. Halpern for $1,000,000 that will mature and expire on or before the second anniversary of September 26, 2015.  Interest will accrue on each advance at an annual rate of 4%. As of December 31, 2013, the Company owed $0 in principal and $0 in accrued interest related to these loans and lines of credit.  We believe that the $1,000,000 line of credit issued will not be sufficient to cover the additional expense arising from maintenance of our regulatory filings with the SEC, and the marketing of our technology over the next twelve months, thus the Company will continue to pursue additional financing and/or additional funding in 2016 to continue marketing the Max Sound HD Audio Technology aggressively to Multi-Media Industry Users of Audio and Audio with Video products. 

 

In 2015, the Company has received from Mr. Halpern additional net advances on the established lines of credit in the amount of $264,000 of which it has repaid $536,000.  As of December 31, 2015, the balance including accrued interest on the line of credit is $473.  This further demonstrates our Chairman’s ongoing commitment to continue financing the Company’s needs.  While the Company expects to have ongoing needs for additional financing, the amount of those needs are not clearly established as the Company moves forward.

 

During the year ended December 31, 2015, the principal stockholder was repaid $536,000.  As of December 31, 2015, the line of credit balance including accrued interest totaled $473.

 

On September 17, 2015, the Company received $170,000 from a related party. Pursuant to the terms of the note, the note is bearing an original issuance discount in the amount of $10,000 and is due on or before October 31, 2015. As of December 31, 2015, the balance of the note is $0, and was fully repaid.

 

In the event that we are unable to obtain additional financing and/or funding or Mr. Halpern either fails to extend us more financing, declines to loan additional cash, declines to fund the line of credit, or declines to defer his salary payments, we will no longer be able to continue to operate and will have to cease operations unless we begin to generate sufficient revenue to cover our costs.

 

Recent Accounting Pronouncements

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest–Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company is currently in the process of evaluating the impact of adoption of ASU 2015-03 on its balance sheets.

 

All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable. 

 

Critical Accounting Policies and Estimates

 

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

 

Use of Estimates:  

In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period.  Actual results could differ from those estimates.

 

Revenue Recognition:  

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is assured. We had $0 and $0 in revenue for the three months ended March 31, 2015 and 2014, respectively.

 

Stock-Based Compensation:

In December 2004, the FASB issued FASB Accounting Standards Codification No. 718, Compensation – Stock Compensation .  Under FASB Accounting Standards Codification No. 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.  As such, compensation cost is measured on the date of grant at their fair value.  Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant.  The Company applies this statement prospectively.

 

 
 

 

Equity instruments (“instruments”) issued to other than employees are recorded on the basis of the fair value of the instruments, as required by FASB Accounting Standards Codification No. 718.  FASB Accounting Standards Codification No. 505,  Equity Based Payments to Non-Employees  defines the measurement date and recognition period for such instruments.  In general, the measurement date is when either a (a) performance commitment, as defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the FASB Accounting Standards Codification.

 

Derivative Financial Instruments

Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model.  In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement.  If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.

 

Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives.  In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.  

 

Impairment of Long-Lived Assets

The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, Accounting for the Impairment or Disposal of Long-Lived Assets."  ASC Topic 360-10-05 requires that long-lived assets, such as technology rights, be reviewed for impairment annually, or whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate.  The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including the eventual disposition.  If the future net cash flows are less than the carrying value of an asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value or disposable value.  For the year ended December 31, 2013, the Company completed an impairment analysis on its' long-lived assets, their technology rights, and determined that no impairment was necessary.

 

The Company believes that the accounting estimate related to asset impairment is a "critical accounting estimate" because the impairment methodology is highly susceptible to change from period to period, because it requires management to make assumptions about future cash flows, and because the impact of recognizing impairment could have a significant effect on operations. Management's assumptions about future cash flows require significant judgment because actual business operations of marketing the technology rights is in its infancy stages and managements expects that their future operating levels to fluctuate. The analysis included assumptions that are based on annual business plans and other forecasted results which are used to reflect market-based estimates of the risks associated with the projected cash flows, based on the best information available as of the date of the impairment test. There can be no assurance that the estimates and assumptions used in the impairment tests will prove to be accurate predictions of the future.  If the future adversely differs from management's best estimate of key economic assumptions, and if associated future cash flows materially decrease, the Company may be required to record impairment charges related to its indefinite life intangible asset. 

 

Prior to February 2011, the Company's business operations were related to the development and launching of a social networking website.  However, since February 2011, our business focus has been on the marketing of our Max Sound HD Audio Technology.  Since 2011, was our initial year of marketing our technology, management considers past operational levels to be inconsistent with future operations mainly due to the shift in business focus.  In our impairment testing, the Company made assumptions towards the income and expenses expected in the future including, but not limited to, determining the actual expenses incurred in the current year that were attributable to the new business focus in order to develop an annual cost benchmark, trends in the marketplace, feedback from current and past marketing activities, and assessments upon the useful life of the technology rights.

 

The Company's primary focus over the next three to five years will be centered on the marketing and implementation of their technology in order to take advantage of the current trends in the marketplace for users of their technology.  In particular, the Company expects that expenses will increase significantly from year to year over the next five years, at which time in year six and beyond the year-to-year change will be a minimal increase.  In addition, the Company expects minimal revenue over the next two years, while in year three to six the Company expects to realize significant year to year increases in revenue, at which time in year seven and beyond the year to year change will be a minimal increase.

 

As part of the impairment test, the Company reviewed its' initial useful life analysis, in reference to their technology, and updated this analysis with factors that existed at the time of the impairment testing and determined that nothing had occurred in the marketplace that would change their initial determination of the useful life of their technology. The analysis included researching known technological advances in the marketplace and determining if those advances, which are similar to the Company’s products, would limit the useful life of the asset. The Company believes that the technological advances in the marketplace are geared to developing different playback devices and the implementation of technology that is similar to the Company's technology. Thus, the Company concluded that their technology rights continue to have an indefinite useful life. However, it is understood that technological advancements could happen in the future that would limit the useful life of their technology.  If a technology was created in the future that would limit the useful life of the technology, the Company would be required to update their impairment testing to include a useful life determination of the technology and may be required to record impairment charges at some time in the future.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities”.

 

 
 

  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are subject to certain market risks, including changes in interest rates and currency exchange rates.  We have not undertaken any specific actions to limit those exposures. 

 

Item 4.  Controls and Procedures

 

Disclosure controls and procedures. Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

   

See NOTE 8 titled LITIGATION for information on Legal Proceedings.

 

Item 1A. Risk Factors.

 

Not required for smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Below is a summary of our capital-raising activities for the three months ended March 31, 2016 and underlying terms:

 

 On January 8, 2016 the Company issued 12,000,000 shares of common stock for services having a fair value of $105,600 ($0.009/share).

 

On January 4, 2016, the Company entered into a conversion agreement with Darling Capital LLC., relating to a convertible promissory note dated June 29, 2015 with the original principal amount of $50,000 for 603,865 shares based on a conversion price of $0.00575 per share.

 

On January 5, 2016, the Company entered into a conversion agreement with Iliad Research and Trading, LP, relating to a convertible promissory note dated August 13, 2014 with the original principal amount of $282,778 for 3,540,067 shares based on a conversion price of $0.00869 per share.

 

On January 5, 2016, the Company entered into a conversion agreement with Vis Vires Group, Inc., relating to a convertible promissory note dated July 2, 2015 with the original principal amount of $104,000 for 5,194,805 shares based on a conversion price of $0.00770 per share.

 

On January 6, 2016, the Company entered into a conversion agreement with JSJ Investments, Inc. relating to a convertible promissory note dated June 22, 2015 with the original principal amount of $150,000 for 6,024,096 shares based on a conversion price of $0.00594 per share.

 

On January 4, 2016, the Company entered into a conversion agreement with Darling Capital LLC., relating to a convertible promissory note dated June 29, 2015 with the original principal amount of $50,000 for 2,269,698 shares based on a conversion price of $0.00575 per share.

 

On January 7, 2016, the Company entered into a conversion agreement with Union Capital, LLC relating to a convertible promissory note dated April 21, 2015 with the original principal amount of $110,250 for 2,096,653 shares based on a conversion price of $0.00630 per share.

 

On January 7, 2016, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated March 17, 2015, with the original principal amount of $110,250 for 2,379,064 shares based on a conversion price of $0.00631 per share.

 

On January 7, 2016, the Company entered into a conversion agreement with Darling Capital LLC., relating to a convertible promissory note dated June 29, 2015 with the original principal amount of $50,000 for 2,999,467 shares based on a conversion price of $0.00466 per share.

 

On January 12, 2016, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated March 17, 2015, with the original principal amount of $110,250 for 4,078,034 shares based on a conversion price of $0.00377 per share.

 

On January 12, 2016, the Company entered into a conversion agreement with Union Capital, LLC relating to a convertible promissory note dated April 21, 2015 with the original principal amount of $110,250 for 2,700,194 shares based on a conversion price of $0.00377 per share.

 

On January 12, 2016, the Company entered into a conversion agreement with Vis Vires Group, Inc., relating to a convertible promissory note dated July 2, 2015 with the original principal amount of $104,000 for 14,817,391 shares based on a conversion price of $0.00461 per share.

 

On January 12, 2016, the Company entered into a conversion agreement with Darling Capital LLC., relating to a convertible promissory note dated June 29, 2015 with the original principal amount of $50,000 for 3,304,598 shares based on a conversion price of $0.00317 per share.

 

On January 13, 2016, the Company entered into a conversion agreement with Union Capital, LLC relating to a convertible promissory note dated April 21, 2015 with the original principal amount of $110,250 for 2,970,851 shares based on a conversion price of $0.00377 per share.

 

On January 14, 2016, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated March 17, 2015, with the original principal amount of $110,250 for 2,652,520 shares based on a conversion price of $0.00377 per share.

 

On January 14, 2016, the Company entered into a conversion agreement with Hightree Capital, LLC, relating to a convertible promissory note dated July 2, 2015 with the original principal amount of $35,000 for 1,627,118 shares based on a conversion price of $0.00384 per share.

 

On January 15, 2016, the Company entered into a conversion agreement with Darling Capital LLC., relating to a convertible promissory note dated June 29, 2015 with the original principal amount of $50,000 for 5,118,877 shares based on a conversion price of $0.00210 per share.

 

On January 19, 2016, the Company entered into a conversion agreement with ZSP Capital, LLC, relating to a convertible promissory note dated July 13, 2015 with the original principal amount of $35,000 for 2,103,879 shares based on a conversion price of $0.00380 per share.

 

On January 20, 2016, the Company entered into a conversion agreement with Hightree Capital, LLC, relating to a convertible promissory note dated July 2, 2015 with the original principal amount of $35,000 for 4,266,042 shares based on a conversion price of $0.00341 per share.

 

On January 21, 2016, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated March 17, 2015, with the original principal amount of $110,250 for 2,852,564 shares based on a conversion price of $0.00312 per share.

 

On January 21, 2016, the Company entered into a conversion agreement with JSJ Investments, Inc. relating to a convertible promissory note dated June 22, 2015 with the original principal amount of $150,000 for 9,469,697 shares based on a conversion price of $0.00264 per share.

 

On January 21, 2016, the Company entered into a conversion agreement with ZSP Capital, LLC, relating to a convertible promissory note dated July 13, 2015 with the original principal amount of $35,000 for 2,902,758 shares based on a conversion price of $0.00344 per share.

 

On January 22, 2016, the Company entered into a conversion agreement with Union Capital, LLC relating to a convertible promissory note dated April 21, 2015 with the original principal amount of $110,250 for 2,942,782 shares based on a conversion price of $0.00312 per share.

 

On January 25, 2016, the Company entered into a conversion agreement with ZSP Capital, LLC, relating to a convertible promissory note dated July 13, 2015 with the original principal amount of $35,000 for 2,481,176 shares based on a conversion price of $0.00318 per share.

 

On January 25, 2016, the Company entered into a conversion agreement with Hightree Capital, LLC, relating to a convertible promissory note dated July 2, 2015 with the original principal amount of $35,000 for 4,505,158 shares based on a conversion price of $0.00322 per share.

 

On January 26, 2016, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated March 17, 2015, with the original principal amount of $110,250 for 3,205,128 shares based on a conversion price of $0.00312 per share.

 

On January 26, 2016, the Company entered into a conversion agreement with Horberg Enterprises, LP relating to a convertible promissory note dated August 21, 2014, with the original principal amount of $250,000 for 3,000,000 shares based on a conversion price of $0.003332 per share.

 

On January 27, 2016, the Company entered into a conversion agreement with Union Capital, LLC relating to a convertible promissory note dated April 21, 2015 with the original principal amount of $110,250 for 3,273,269 shares based on a conversion price of $0.00312 per share.

 

On January 27, 2016, the Company entered into a conversion agreement with JSJ Investments, Inc. relating to a convertible promissory note dated June 22, 2015 with the original principal amount of $150,000 for 10,023,662shares based on a conversion price of $0.00264 per share.

 

On February 1, 2016, the Company entered into a conversion agreement with Union Capital, LLC relating to a convertible promissory note dated April 21, 2015 with the original principal amount of $110,250 for 2,293,747 shares based on a conversion price of $0.00312 per share.

 

On February 3, 2016, the Company entered into a conversion agreement with Union Capital, LLC relating to a convertible promissory note dated April 21, 2015 with the original principal amount of $110,250 for 2,247,899 shares based on a conversion price of $0.00228 per share.

 

On February 8, 2016, the Company entered into a conversion agreement with LG Capital Funding, LLC relating to a convertible promissory note dated August 4, 2015, with the original principal amount of $57,500 for 5,718,501 shares based on a conversion price of $0.00228 per share.

 

On February 8, 2016, the Company entered into a conversion agreement with Iliad Research and Trading, LP, relating to a convertible promissory note dated August 7, 2015 with the original principal amount of $143,889 for 13,186,813 shares based on a conversion price of $0.00228 per share.

 

On February 10, 2016, the Company entered into a conversion agreement with Union Capital, LLC relating to a convertible promissory note dated April 21, 2015 with the original principal amount of $110,250 for 3,241,833 shares based on a conversion price of $0.00227 per share.

 

On February 17, 2016, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated March 17, 2015, with the original principal amount of $110,250 for 11,098,901 shares based on a conversion price of $0.00377 per share.

 

On February 17, 2016, the Company entered into a conversion agreement with Rock Capital relating to a convertible promissory note dated August 25, 2015, with the original principal amount of $36,750 for 4,646,075 shares based on a conversion price of $0.00228 per share.

 

On February 18, 2016, the Company entered into a conversion agreement with LG Capital Funding, LLC relating to a convertible promissory note dated August 4, 2015, with the original principal amount of $57,500 for 6,876,650 shares based on a conversion price of $0.00227 per share.

 

On February 19, 2016, the Company entered into a conversion agreement with Auctus Fund, LLC relating to a convertible promissory note dated August 19, 2015, with the original principal amount of $55,750 for 11,118,234 shares based on a conversion price of $0.00195 per share.

 

On February 26, 2016, the Company entered into a conversion agreement with Iliad Research and Trading, LP, relating to a convertible promissory note dated August 7, 2015 with the original principal amount of $143,889 for 16,483,516 shares based on a conversion price of $0.00182 per share.

 

On February 29, 2016, the Company entered into a conversion agreement with LG Capital Funding, LLC relating to a convertible promissory note dated August 4, 2015, with the original principal amount of $57,500 for 6,892,549shares based on a conversion price of $0.00182 per share.

 

On March 8, 2016, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated March 17, 2015, with the original principal amount of $110,250 for 4,307,692 shares based on a conversion price of $0.00163 per share.

 

On March 9, 2016, the Company entered into a conversion agreement with LG Capital Funding, LLC relating to a convertible promissory note dated August 4, 2015, with the original principal amount of $57,500 for 6,080,359 shares based on a conversion price of $0.00172 per share.

 

On March 10, 2016, the Company entered into a conversion agreement with Oakmore Opportunity Fund I, LP, relating to a convertible promissory note dated July 28, 2015, with the original principal amount of $37,000 for 2,670,882 shares based on a conversion price of $0.00214 per share.

 

On March 14, 2016, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated March 17, 2015, with the original principal amount of $110,250 for 3,988,604 shares based on a conversion price of $0.00175 per share.

 

On March 15, 2016, the Company entered into a conversion agreement with LG Capital Funding, LLC relating to a convertible promissory note dated August 4, 2015, with the original principal amount of $57,500 for 5,061,393 shares based on a conversion price of $0.00166 per share.

 

On March 18, 2016, the Company entered into a conversion agreement with Iliad Research and Trading, LP, relating to a convertible promissory note dated August 7, 2015 with the original principal amount of $143,889 for 18,094,089 shares based on a conversion price of $0.00166 per share.

 

On March 21, 2016, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated March 17, 2015, with the original principal amount of $110,250 for 5,917,160 shares based on a conversion price of $0.00169 per share.

 

On March 28, 2016, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated March 17, 2015, with the original principal amount of $110,250 for 11,834,320 shares based on a conversion price of $0.00169 per share.

 

On March 28, 2016, the Company entered into a conversion agreement with Rock Capital relating to a convertible promissory note dated February 24, 2016, with the original principal amount of $46,316 for 12,357,121 shares based on a conversion price of $0.00162 per share.

 

On March 29, 2016, the Company entered into a conversion agreement with Adar Bays, LLC relating to a convertible promissory note dated March 17, 2015, with the original principal amount of $110,250 for 24,881,604 shares based on a conversion price of $0.00163 per share.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits

 

All 10 Form exhibits previously exhibited associated with all Company 10 Form filings are incorporated herein.

 

  Exhibit Number     Description
  10.1     Convertible Redeemable Replacement Note, Dated 2.23.16 issued to ROCK CAPITAL, LLC
  10.2     Convertible Redeemable Replacement Note, Dated 2.23.16 issued to ROCK CAPITAL, LLC
  10.3     Convertible Redeemable Note, Dated 2.24.16 issued to ILIAD RESEARCH & TRADING L.P.
  10.4     Convertible Redeemable Replacement Note, Dated 3.7.16 issued to ROCK CAPITAL, LLC
  10.5     Convertible Redeemable Note, Dated 3.10.16 issued to THE VECHERY FAMILY TRUST
  10.6     Convertible Redeemable Note, Dated 3.14.16 issued to THE VECHERY GRANDCHILDREN'S TRUST
  10.7     Convertible Redeemable Note, Dated 3.17.16 issued to ADAR BAYS, LLC
  10.8     Convertible Redeemable Note, Dated 3.25.16 issued to THE VECHERY GRANDCHILDREN'S TRUST
  31.1     Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer
  31.2     Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer
  32     Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

   

 
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 13, 2016.

 

MAX SOUND CORPORATION    
(Registrant)    
     
By:   /s/ John Blaisure
    John Blaisure
    Chief Executive Officer
(Principal Executive Officer)
     
By:   /s/ Greg Halpern
    Greg Halpern
    Chief Financial Officer
(Principal Financial and Accounting Officer)
     

 

 

 

THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN AND WILL NOT BE REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER (THE "1933 ACT”)

 

 

US $110,250.00

 

MAX SOUND CORPORATION.

8% CONVERTIBLE REDEEMABLE NOTE DUE MARCH 1 7 , 2016

BACK END NOTE

 

 

FOR VALUE RECEIVED, Max Sound Corporation. (the “Company”) promises to pay to the order of ADAR BAYS, LLC and its authorized successors and permitted assigns (" Hold- er "), the aggregate principal face amount of One Hundred Ten Thousand Two Hundred Fifty Dollars exactly (U.S. $110,250.00) on March 1 7 , 2016 ( "Maturity Date") and to pay interest on the principal amount outstanding hereunder at the rate of 8% per annum commencing on March 1 7 , 2015. The Company acknowledges this Note was issued with a 5% original issue dis-count (OID) and as such the issuance price was $105,000.00. The interest will be paid to the Holder in whose name this Note is registered on the records of the Company regarding registra-tion and transfers of this Note. The principal of, and interest on, this Note are payable at 3411 Indian Creek Drive, Suite 403, Miami Beach, FL 33140, initially, and if changed, last appearing on the records of the Company as designated in writing by the Holder hereof from time to time. The Company will pay each interest payment and the outstanding principal due upon this Note before or on the Maturity Date, less any amounts required by law to be deducted or withheld, to the Holder of this Note by check or wire transfer addressed to such Holder at the last address ap- pearing on the records of the Company. The forwarding of such check or wire transfer shall con- stitute a payment of outstanding principal hereunder and shall satisfy and discharge the liability for principal on this Note to the extent of the sum represented by such check or wire transfer. In- terest shall be payable in Common Stock (as defined below) pursuant to paragraph 4(b) herein.

 

This Note is subject to the following additional provisions:

 

GH

Initials

 
 

1.                   This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for such registration or transfer or exchange, except that Holder shall pay any tax or other governmental charges payable in connection therewith.

 

2.                   The Company shall be entitled to withhold from all payments any amounts required to be withheld under applicable laws.

 

3.                   This Note may be transferred or exchanged only in compliance with the Securities Act of 1933, as amended (" Act ") and applicable state securities laws. Any attempted transfer to a non-qualifying party shall be treated by the Company as void. Prior to due present- ment for transfer of this Note, the Company and any agent of the Company may treat the person in whose name this Note is duly registered on the Company's records as the owner hereof for all other purposes, whether or not this Note be overdue, and neither the Company nor any such agent shall be affected or bound by notice to the contrary. Any Holder of this Note electing to exercise the right of conversion set forth in Section 4(a) hereof, in addition to the requirements set forth in Section 4(a), and any prospective transferee of this Note, also is required to give the Company written confirmation that this Note is being converted (" Notice of C onversion") in the form annexed hereto as Exhibit A . The date of receipt (including receipt by telecopy) of such Notice of Conversion shall be the Conversion Date.

 

4.                   (a) The Holder of this Note is entitled, at its option, to convert all or any amount of the principal face amount of this Note then outstanding into shares of the Compa- ny's common stock (the " Common S tock") at a price ( "Conversion P rice") for each share of Common Stock equal to 65% of the lowest daily VWAP of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future (" E xchange"), for the ten prior trading days including the day upon which a Notice of Conversion is received by the Company (provided such Notice of Conversion is delivered by fax or other electronic method of communication to the Company after 4 P.M. Eastern Standard or Daylight Savings Time if the Holder wishes to include the same day closing price). If the shares have not been delivered with- in 3 business days, the Notice of Conversion may be rescinded. Such conversion shall be effec- tuated by the Company delivering the shares of Common Stock to the Holder within 3 business days of receipt by the Company of the Notice of Conversion. Once the Holder has received such shares of Common Stock, the Holder shall surrender this Note to the Company, executed by the Holder evidencing such Holder's intention to convert this Note or a specified portion hereof, and accompanied by proper assignment hereof in blank. Accrued but unpaid interest shall be subject to conversion. No fractional shares or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded to the nearest whole share . In the event the Company experiences a DTC “Chill” on its shares, the conversion price shall be de- creased to 55 % instead of 65% while that “Chill” is in effect. In no event shall the Holder be al- lowed to effect a conversion if such conversion, along with all other shares of Company Com- mon Stock beneficially owned by the Holder and its affiliates would exceed 9.9% of the out- standing shares of the Common Stock of the Company.

 
 

(b)                Interest on any unpaid principal balance of this Note shall be paid at the rate of 8% per annum. Interest shall be paid by the Company in Common Stock ("Interest Shares"). Holder may, at any time, send in a Notice of Conversion to the Company for Interest Shares based on the formula provided in Section 4(a) above. The dollar amount converted into Interest Shares shall be all or a portion of the accrued interest calculated on the unpaid principal balance of this Note to the date of such notice.

 

(c)                 This Note may not be prepaid, except that if the $110,250 Rule 144 con- vertible redeemable note issued by the Company of even date herewith is redeemed by the Com- pany within 6 months of the issuance date of such Note, all obligations of the Company under this Note and all obligations of the Holder under the Holder issued Back End Note will be auto- matically be deemed satisfied and this Note and the Holder issued Back End Note will be auto- matically be deemed cancelled and of no further force or effect.

 

(d)                Upon (i) a transfer of all or substantially all of the assets of the Company to any person in a single transaction or series of related transactions, (ii) a reclassification, capital reorganization or other change or exchange of outstanding shares of the Common Stock, other than a forward or reverse stock split or stock dividend, or (iii) any consolidation or merger of the Company with or into another person or entity in which the Company is not the surviving entity (other than a merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock) (each of items (i), (ii) and (iii) being re- ferred to as a "Sale Event"), then, in each case, the Company shall, upon request of the Holder, redeem this Note in cash for 150% of the principal amount, plus accrued but unpaid interest through the date of redemption, or at the election of the Holder, such Holder may convert the un- paid principal amount of this Note (together with the amount of accrued but unpaid interest) into shares of Common Stock immediately prior to such Sale Event at the Conversion Price.

 

(e)                 In case of any Sale Event (not to include a sale of all or substantially all of the Company’s assets) in connection with which this Note is not redeemed or converted, the Company shall cause effective provision to be made so that the Holder of this Note shall have the right thereafter, by converting this Note, to purchase or convert this Note into the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation or merger by a holder of the number of shares of Common Stock that could have been purchased upon exercise of the Note and at the same Conversion Price, as defined in this Note, immediately prior to such Sale Event. The foregoing provisions shall similarly apply to successive Sale Events. If the considera- tion received by the holders of Common Stock is other than cash, the value shall be as deter- mined by the Board of Directors of the Company or successor person or entity acting in good faith.

 

5.                   No provision of this Note shall alter or impair the obligation of the Com- pany, which is absolute and unconditional, to pay the principal of, and interest on, this Note at the time, place, and rate, and in the form, herein prescribed.

 
 

6.                   The Company hereby expressly waives demand and presentment for pay- ment, notice of non-payment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, and diligence in taking any action to collect amounts called for hereunder and shall be directly and primarily liable for the payment of all sums owing and to be owing hereto.

 

7.                   The Company agrees to pay all costs and expenses, including reasonable attorneys' fees and expenses, which may be incurred by the Holder in collecting any amount due under this Note.

 

8. If one or more of the following described "Events of Default" shall occur:

 

(a)                   The Company shall default in the payment of principal or interest on this Note or any other note issued to the Holder by the Company; or

 

(b)                  Any of the representations or warranties made by the Company herein or in any certificate or financial or other written statements heretofore or hereafter furnished by or on behalf of the Company in connection with the execution and delivery of this Note shall be false or misleading in any respect; or

 

(c)                   The Company shall fail to perform or observe, in any respect, any cove- nant, term, provision, condition, agreement or obligation of the Company under this Note or any other note issued to the Holder and not cure such breach within 10 days; or

 

(d)                  The Company shall (1) become insolvent; (2) admit in writing its inability to pay its debts generally as they mature; (3) make an assignment for the benefit of creditors or commence proceedings for its dissolution; (4) apply for or consent to the appointment of a trus- tee, liquidator or receiver for its or for a substantial part of its property or business; (5) file a peti- tion for bankruptcy relief, consent to the filing of such petition or have filed against it an invol- untary petition for bankruptcy relief, all under federal or state laws as applicable; or

 

(e)                   A trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without its consent and shall not be discharged with- in sixty (60) days after such appointment; or

 

(f)                   Any governmental agency or any court of competent jurisdiction at the in- stance of any governmental agency shall assume custody or control of the whole or any substan- tial portion of the properties or assets of the Company; or

 

(g)                  One or more money judgments, writs or warrants of attachment, or similar process, in excess of fifty thousand dollars ($50,000) in the aggregate, shall be entered or filed against the Company or any of its properties or other assets and shall remain unpaid, unvacated, unbonded or unstayed for a period of fifteen (15) days or in any event later than five (5) days prior to the date of any proposed sale thereunder; or

 
 

(h)                  The Company shall have defaulted on or breached any term of any other note of similar debt instrument into which the Company has entered and failed to cure such de- fault within the appropriate grace period; or

 

(i)                    The Company shall have its Common Stock delisted from a market (in- cluding the OTCQB marketplace) or, if the Common Stock trades on an exchange, then trading in the Common Stock shall be suspended for more than 10 consecutive days;

 

(j) Intentionally Deleted;

 

(k)                  The Company shall not deliver to the Holder the Common Stock pursuant to paragraph 4 herein without restrictive legend within 3 business days of its receipt of a Notice of Conversion; or

 

(l)                    Once cash funded, the Company shall not replenish the reserve set forth in Section 12, within 5 business days of the request of the Holder in which case the conversion dis- count set forth in Section 4(a) shall be increased from a 35% conversion discount to a 50% con- version discount and shall be increased from the 50% conversion discount then in effect to an 80% conversion discount if the increase is not effective within 10 business days of the replen- ishment request; or

 

(m)                   The Company’s Common Stock has a closing bid price of less than $0.02 per share for at least 5 consecutive trading days; or

 

(n)                  The aggregate dollar trading volume of the Company’s Common Stock is less than fifty thousand dollars ($50,000.00) in any 5 consecutive trading days; or

 

(o)                  The Company shall cease to be “current” in its filings with the Securities and Exchange Commission; or.

 

(p)      The Company shall lose the “bid” price for its stock and a market (including the OTCBB marketplace or other exchange)

 

Then, or at any time thereafter, unless cured (except for 8(m) and 8(n) which are incurable de- faults, the sole remedy of which is to allow the Holder to cancel both this Note and the Holder Issued Note, and in each and every such case, unless such Event of Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subse- quent default) at the option of the Holder and in the Holder's sole discretion, the Holder may consider this Note immediately due and payable, without presentment, demand, protest or (fur- ther) notice of any kind (other than notice of acceleration), all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwith- standing, and the Holder may immediately, and without expiration of any period of grace, en- force any and all of the Holder's rights and remedies provided herein or any other rights or reme- dies afforded by law. Upon an Event of Default, interest shall be accrue at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest

 
 

rate of interest permitted by law. Further, if the Note becomes due and payable, the Holder may use the outstanding principal and interest due under the Note to offset any payment obligations it may have to the Company. In the event of a breach of 8(k) the penalty shall be $250 per day the shares are not issued beginning on the 4 th day after the conversion notice was delivered to the Company. This penalty shall increase to $500 per day beginning on the 10 th day. Once cash funded, the penalty for a breach of Section 8(p) shall be an increase of the outstanding principal amounts by 20%. Once cash funded, in the event of a breach of Section 8(i), the outstanding

principal due under this Note shall increase by 50%. If this Note is not paid at maturity, the out- standing principal due under this Note shall increase by 10%.

 

If the Holder shall commence an action or proceeding to enforce any provisions of this Note, in- cluding, without limitation, engaging an attorney, then, if the Holder prevails in such action, the Holder shall be reimbursed by the Company for its attorneys’ fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.

 

Make-Whole for Failure to Deliver Loss. At the Holder’s election, if the Company fails for any reason to deliver to the Holder the conversion shares by the by the 3rd business day following the delivery of a Notice of Conversion to the Company and if the Holder incurs a Failure to De- liver Loss, then at any time the Holder may provide the Company written notice indicating the amounts payable to the Holder in respect of the Failure to Deliver Loss and the Company must make the Holder whole as follows:

Failure to Deliver Loss = [(High trade price at any time on or after the day of exercise) x (Num- ber of conversion shares)]

 

9.                   In case any provision of this Note is held by a court of competent jurisdic- tion to be excessive in scope or otherwise invalid or unenforceable, such provision shall be ad- justed rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Note will not in any way be affected or impaired thereby.

 

10.               Neither this Note nor any term hereof may be amended, waived, dis- charged or terminated other than by a written instrument signed by the Company and the Holder.

 

11.               The Company represents that it is not a “shell” issuer and has never been a “shell” issuer or that if it previously has been a “shell” issuer that at least 12 months have passed since the Company has reported form 10 type information indicating it is no longer a “shell issu- er. Further. The Company will instruct its counsel to either (i) write a “144- 3(a)(9)” opinion to allow for salability of the conversion shares or (ii) accept such opinion from Holder’s counsel.

 

12.               Prior to cash funding of this Note, The Company will issue irrevocable transfer agent instructions reserving 2x the number of shares of Common Stock necessary to al- low the holder to convert this note based on the discounted conversion price set forth in Section 4(a) herewith. The reserve shall be replenished as needed to allow for conversions of this Note using said 2x reserve, provided an increase notice may not be delivered more than once every 30 days for the first 5 months the Note is in effect. Upon full conversion of this Note, the reserve

 
 

representing this Note shall be cancelled. The Company will pay all transfer agent costs associ- ated with issuing and delivering the shares.

 

13.               The Company will give the Holder direct notice of any corporate actions including but not limited to name changes, stock splits, recapitalizations etc. This notice shall be given to the Holder as soon as possible under law.

 

14.               This Note shall be governed by and construed in accordance with the laws of New York applicable to contracts made and wholly to be performed within the State of New York and shall be binding upon the successors and assigns of each party hereto. The Holder and the Company hereby mutually waive trial by jury and consent to exclusive jurisdiction and venue in the courts of the State of New York. This Agreement may be executed in counterparts, and the facsimile transmission of an executed counterpart to this Agreement shall be effective as an original.

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by an officer thereunto duly authorized.

 

 

Dated: 03/17/2015

 

 

 

MAX SOUND CORPORATION

 

By:

 

Title: CFO

 
 

EXHIBIT A

 

 

NOTICE OF CONVERSION

 

(To be Executed by the Registered Holder in order to Convert the Note)

 

The undersigned hereby irrevocably elects to convert $ of the above Note into Shares of Common Stock of Max Sound Corporation. (“Shares”) accord- ing to the conditions set forth in such Note, as of the date written below.

 

If Shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer and other taxes and charges payable with respect thereto.

 

Date of Conversion: Applicable Conversion Price: Signature:

[Print Name of Holder and Title of Signer]

Address:

 

 

 

SSN or EIN:

Shares are to be registered in the following name:

 

Name: Address: Tel: Fax: SSN or EIN:

 

Shares are to be sent or delivered to the following account:

 

Account Name: Address:

 

 

THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN AND WILL NOT BE REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER (THE "1933 ACT”)

 

 

 

$2,000,000.00

 

MAX SOUND CORPORATION

8% CONVERTIBLE REDEEMABLE NOTE DUE MARCH 25, 2017

 

FOR VALUE RECEIVED, Max Sound Corporation. (the “Company”) promises to pay to the order of The Vechery Family Trust and its authorized successors and permitted assigns ("Holder"), the aggregate principal face amount of up to two million dollars (U.S. $2,000,000.00) on March 25, 2017 ("Maturity Date") and to pay interest on the principal amount outstanding hereunder at the rate of 8% per annum commencing on March 25,

2016. Holder will fund $870,000 on 3-25-16, but by no means later than 3-30-16, which along with the $130,000 already funded, will total $1,000,000. At Holder’s option, he may fund the 2 nd

$1,000,000 and add it to this Note. The interest will be paid to the Holder in whose name this Note is registered on the records of the Company regarding registration and transfers of this Note. The principal of, and interest on, this Note are payable to the Holder, initially, and if changed, last appearing on the records of the Company as designated in writing by the Holder hereof from time to time. The Company will pay each interest payment and the outstanding principal due upon this Note before or on the Maturity Date, less any amounts required by law to be deducted or withheld, to the Holder of this Note by check or wire transfer addressed to such Holder at the last address appearing on the records of the Company. The forwarding of such check or wire transfer shall constitute a payment of outstanding principal hereunder and shall satisfy and discharge the liability for principal on this Note to the extent of the sum represented by such check or wire transfer. Interest shall be payable in Common Stock (as defined below) pursuant to paragraph 4(b) herein.

 

This Note is subject to the following additional provisions:

 
 

 

1.                   This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for such registration or transfer or exchange, except that Holder shall pay any tax or other governmental charges payable in connection therewith.

 

2.                   The Company shall be entitled to withhold from all payments any amounts required to be withheld under applicable laws.

 

3.                   This Note may be transferred or exchanged only in compliance with the Securities Act of 1933, as amended (" Act ") and applicable state securities laws. Any attempted transfer to a non-qualifying party shall be treated by the Company as void. Prior to due presentment for transfer of this Note, the Company and any agent of the Company may treat the person in whose name this Note is duly registered on the Company's records as the owner hereof for all other purposes, whether or not this Note be overdue, and neither the Company nor any such agent shall be affected or bound by notice to the contrary. Any Holder of this Note electing to exercise the right of conversion set forth in Section 4(a) hereof, in addition to the requirements set forth in Section 4(a), and any prospective transferee of this Note, also is required to give the Company written confirmation that this Note is being converted (" Notice of Conversion ") in the form annexed hereto as Exhibit A . The date of receipt (including receipt by telecopy) of such Notice of Conversion shall be the Conversion Date.

 

4.                   (a) The Holder of this Note is entitled, at its option, to convert all or any amount of the principal face amount of this Note then outstanding into shares of the Company's common stock (the " Common Stock ") without restrictive legend of any nature, at a price (" Conversion Price ") for each share of Common Stock equal to 65% of the average of the three lowest daily VWAP's with a 10 day look back of the Common Stock as reported on the National Quotations Bureau OTCQB exchange which the Company’s shares are traded or any exchange upon which the Common Stock may be traded in the future (" Exchange "), including the day upon which a Notice of Conversion is received by the Company (provided such Notice of Conversion is delivered by fax, email or other electronic method of communication to the Company after 4 P.M. Eastern Standard or Daylight Savings Time if the Holder wishes to include the same day closing price). If the shares have not been delivered within 3 business days, the Notice of Conversion may be rescinded. Such conversion shall be effectuated by the Company delivering the shares of Common Stock to the Holder within 3 business days of receipt by the Company of the Notice of Conversion. Once the Holder has received such shares of Common Stock, the Holder shall surrender this Note to the Company, executed by the Holder evidencing such Holder's intention to convert this Note or a specified portion hereof, and accompanied by proper assignment hereof in blank. Accrued, but unpaid interest shall be subject to conversion. No fractional shares or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded to the nearest whole share .

 

(b)                Interest on any unpaid principal balance of this Note shall be paid at the rate of 8% per annum. Interest shall be paid by the Company in Common Stock ("Interest Shares"). Holder may, at any time, send in a Notice of Conversion to the Company for Interest Shares based on the formula provided in Section 4(a) above. The dollar amount converted into

2

 
 

Interest Shares shall be all or a portion of the accrued interest calculated on the unpaid principal balance of this Note to the date of such notice.

 

(c)                 During the first six months this Note is in effect, the Company at its option may redeem this Note by paying to the Holder an amount as follows: (i) if the redemption is within the first 90 days this Note is in effect, then for an amount equal to 130% of the unpaid principal amount of this Note along with any interest that has accrued during that period, (ii) if the redemption is after the 90 th day this Note is in effect, but less than the 181 st day this Note is in effect, then for an amount equal to 2,0% of the unpaid principal amount of this Note along with any accrued interest. This Note may not be redeemed by the Company after 180 days. The redemption must be closed and paid for within 3 business days of the Company sending the redemption demand or the redemption will be invalid and the Company may not redeem this Note.

 

(d)                Upon (i) a transfer of all or substantially all of the assets of the Company to any person in a single transaction or series of related transactions, (ii) a reclassification, capital reorganization or other change or exchange of outstanding shares of the Common Stock, other than a forward or reverse stock split or stock dividend, or (iii) any consolidation or merger of the Company with or into another person or entity in which the Company is not the surviving entity (other than a merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock) (each of items (i), (ii) and (iii) being referred to as a "Sale Event"), then, in each case, the Company shall, upon request of the Holder, redeem this Note in cash for 150% of the principal amount, plus accrued but unpaid interest through the date of redemption, or at the election of the Holder, such Holder may convert the unpaid principal amount of this Note (together with the amount of accrued but unpaid interest) into shares of Common Stock immediately prior to such Sale Event at the Conversion Price.

 

(e)                 In case of any Sale Event (not to include a sale of all or substantially all of the Company’s assets) in connection with which this Note is not redeemed or converted, the Company shall cause effective provision to be made so that the Holder of this Note shall have the right thereafter, by converting this Note, to purchase or convert this Note into the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization or other change, consolidation or merger by a holder of the number of shares of Common Stock that could have been purchased upon exercise of the Note and at the same Conversion Price, as defined in this Note, immediately prior to such Sale Event. The foregoing provisions shall similarly apply to successive Sale Events. If the consideration received by the holders of Common Stock is other than cash, the value shall be as determined by the Board of Directors of the Company or successor person or entity acting in good faith.

 

5.                   No provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and interest on, this Note at the time, place, and rate, and in the form, herein prescribed.

 
 

The Company hereby expressly waives demand and presentment for payment, notice of non- payment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, and diligence in taking any action to collect amounts called for hereunder and shall be directly and primarily liable for the payment of all sums owing and to be owing hereto.

 

6.                   The Company agrees to pay all costs and expenses, including reasonable attorneys' fees and expenses, which may be incurred by the Holder in collecting any amount due under this Note.

 

7. If one or more of the following described "Events of Default" shall occur:

 

(a)                   The Company shall default in the payment of principal or interest on this Note or any other note issued to the Holder by the Company; or

 

(b)                  Any of the representations or warranties made by the Company herein or in any certificate or financial or other written statements heretofore or hereafter furnished by or on behalf of the Company in connection with the execution and delivery of this Note, or the Securities Purchase Agreement under which this note was issued shall be false or misleading in any respect; or

 

(c)                   The Company shall fail to perform or observe, in any respect, any covenant, term, provision, condition, agreement or obligation of the Company under this Note or any other note issued to the Holder; or

 

(d)                  The Company shall (1) become insolvent; (2) admit in writing its inability to pay its debts generally as they mature; (3) make an assignment for the benefit of creditors or commence proceedings for its dissolution; (4) apply for or consent to the appointment of a trustee, liquidator or receiver for its or for a substantial part of its property or business; (5) file a petition for bankruptcy relief, consent to the filing of such petition or have filed against it an involuntary petition for bankruptcy relief, all under federal or state laws as applicable; or

 

(e)                   A trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without its consent and shall not be discharged within sixty (60) days after such appointment; or

 

(f)                   Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company; or

 

(g)                  One or more money judgments, writs or warrants of attachment, or similar process, in excess of fifty thousand dollars ($50,000) in the aggregate, shall be entered or filed against the Company or any of its properties or other assets and shall remain unpaid, unvacated, unbonded or unstayed for a period of fifteen (15) days or in any event later than five (5) days prior to the date of any proposed sale thereunder; or

 

(h)                  The Company shall have defaulted on or breached any term of any other note of similar debt instrument into which the Company has entered and failed to cure such de

 
 

fault within the appropriate grace period; or

 

(i)                    The Company shall have its Common Stock delisted from an exchange (including the OTCQB exchange) or, if the Common Stock trades on an exchange, then trading in the Common Stock shall be suspended for more than 10 consecutive days;

 

(j)                    If a majority of the members of the Board of Directors of the Company on the date hereof are no longer serving as members of the Board;

 

(k)                  The Company shall not deliver to the Holder the Common Stock pursuant to paragraph 4 herein without restrictive legend within 3 business days of its receipt of a Notice of Conversion; or

 

Then, or at any time thereafter, unless cured, and in each and every such case, unless such Event of Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default) at the option of the Holder and in the Holder's sole discretion, the Holder may consider this Note immediately due and payable, without presentment, demand, protest or (further) notice of any kind (other than notice of acceleration), all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and the Holder may immediately, and without expiration of any period of grace, enforce any and all of the Holder's rights and remedies provided herein or any other rights or remedies afforded by law. Upon an Event of Default, interest shall accrue at a default interest rate of 16% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law. In the event of a breach of Section 8(k) the penalty shall be $250 per day the shares are not issued beginning on the 4 th day after the conversion notice was delivered to the Company. This penalty shall increase to $500 per day beginning on the

10 th day.

 

If the Holder shall commence an action or proceeding to enforce any provisions of this Note, including, without limitation, engaging an attorney, then if the Holder prevails in such action, the Holder shall be reimbursed by the Company for its attorneys’ fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.

 

8.                   In case any provision of this Note is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Note will not in any way be affected or impaired thereby.

 

9.                   Neither this Note nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the Company and the Holder.

 

The Company represents that it is not a “shell” issuer and has never been a “shell” issuer or that if it previously has been a “shell” issuer that at least 12 months have passed since the Company has

 
 

reported form 10 type information indicating it is no longer a “shell issuer. Further. The Company will instruct its counsel to either (i) write a 144-3(a(9) opinion to al low for salability of the conversion shares or (ii) accept such opinion from Holder’s counsel.

 

1.                The Company will give the Holder direct notice of any corporate actions, including but not limited to name changes, stock splits, recapitalizations etc. This notice shall be given to the Holder as soon as possible under law.

 

2.                    This Note shall be governed by and construed in accordance with the Laws of Delaware applicable to contracts made and wholly to be performed within the State of California County of San Diego and shall be binding upon the successors and assigns of each party hereto. The Holder and the Company hereby mutually waive trial by jury and consent to exclusive jurisdiction and venue in the courts of the State of California County of San Diego. This Agreement may be executed in counterparts, and the facsimile transmission of an executed counterpart to this Agreement shall be effective as an original.

 

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by an officer thereunto duly authorized.

 

 

Dated: March 25, 2016

 

 

 

MAX SOUND CORPORATION

 

 

 

 

By: Greg Halpern - Chairman & CFO
 
 

EXHIBIT A

 

 

NOTICE OF CONVERSION